The last inflation data showed that rents remained stubbornly high in November, but real-time data suggests domestic rental prices could fall heading into 2023.
The housing component of November’s Consumer Price Index (CPI) — which accounts for about a third of the headline inflation index — rose 0.6% month-over-month and 7.1% year over year. The housing component includes the price of rents and what it would cost the landlord to rent an equivalent apartment, referred to as equivalent landlord rent.
But at the same time, real-time data shows that rents across the country have fallen for the third consecutive month. And given the lagged nature of the CPI, inflation data will likely take time to reflect this reality.
“The largest core component of the CPI – rent – continues to rise rapidly, but the rate of increase has peaked in recent months,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note following. Tuesday’s data, adding: “It’s increasingly clear from the private sector rent data that the next big move in the CPI measure will be a substantial slowdown.
Accommodation costs were “by far the biggest contributor” to the overall gain in the CPI, the Bureau of Labor Statistics announced on Tuesday. Overall, consumer prices rose at a 7.1% annual ratewhile core CPI, which excludes the volatile food and energy sectors, rose 6% from a year ago.
But the data of Zillow Observed Rent Index showed that asking rents for new leases nationwide fell 0.4% from October to November, the biggest one-month drop in the seven-year history of the survey. The national average asking rent now stands at $2,008, according to the survey, up 8.4% from the same time last year.
RealPage data also points to a dramatic deceleration in rent growth, which reached 6.5% year-over-year for new leases. This is the lowest reading since June 2021 and down from a peak of 15.7% in March 2022.
“The market has changed very quickly here, from a market favored by housing providers to one that is really shifting in favor of tenants who are seeing higher vacancy rates,” said Jay Parsons, vice president and head of economics and industry for RealPage, in a webinar on Tuesday.
The Fed’s housing dilemma
With this inflation dynamics showing a gap between real-time data and government inflation data, investors are weighing the impact this could have on future Federal Reserve actions.
On Wednesday, the central bank released a Interest rate hike of 0.50%the seventh and final interest rate hike of 2022, a year that has seen a 4.25% cumulative increase in interest rates, the highest since 1980.
Rents “are going to be renewed in a market where rates are higher than they were when the original leases were signed,” Fed Chairman Jerome Powell said at a press conference on Wednesday. . “But we’re seeing the rate for new leases coming down. So once we get that backlog resolved, that inflation will go down next year.”
During his last press conference in November, Powell acknowledged that while the policy is acting with a lag, “there are still significant rate increases ahead” for rent prices as cheaper rents are renewed at higher market prices .
However, some experts fear that the central bank may be overestimating the remaining “premium” on leases expiring and up for renewal.
“As we see in our data, this acceleration potential is actually much lower than [Powell] may indicate,” Parsons said.
In other words, although Powell and the Fed forecast a slowdown in rent inflation next year and an easing in overall pricing pressures, real-time data suggests the decline could be even steeper than planned by the Fed.
Data from RealPage shows the lease loss premium – the difference between new leases on the market and existing ones – fell from 9.4% in June to 5.8% in October, market pressure of housing in the broad sense having contributed to to slow down new lease rents and accelerated renewals.
Going forward, the change to rental loss premium adds three things, parson wrote.
First, renewal rent increases will ease significantly in the future. Second, the CPI housing index is lagging for new leases and embedded rents. And third, there are benefits for real estate investors, as cap rates will need to rise given the higher rates and lower loss-to-lease ratio.
“As that gap narrows…there is less avenue for renewal,” Parsons said. “You can’t raise your renewal rents above market rent” because that would encourage tenants to move out or look elsewhere.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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