Housing inflation is at a fever pitch — is this the peak?January 13, 2022
Housing is the largest expense for many Americans. And it’s taking a bigger bite out of people’s wallets, as far as the Consumer Price Index is concerned.
The shelter component of the inflation barometer increased 0.4% between November and December, down slightly from a 0.5% uptick the prior month. Nevertheless, annual growth set records. In particular, the component that measures the equivalent rent that homeowners would pay for their houses rose 3.8% between December 2020 and December 2021, the highest rate since 2007.
The cost of shelter is the biggest component of the overall Consumer Price Index, reflecting the importance of rent and mortgage payments in a household’s budget. But even as housing inflation has risen to record levels in terms of the index, the increases seem small by comparison to other barometers of home prices.
A leading measure of home prices, the S&P CoreLogic Case-Shiller Home Price Indices, notched a 19.1% annual gain in home prices nationally in October, the most recent month for which data is available. Meanwhile, the most recent national rent report from real-estate website Apartment List showed that the median rent nationwide increased 17.8% over the course of 2021.
This discrepancy between the housing inflation picked up by the CPI and the rising housing prices seen with other indicators is by design, economists say. The housing components of the CPI are “designed to measure the cost of living from month to month,” said Paul Ashworth, chief North America economist at Capital Economics. “So CPI housing shouldn’t fully reflect changes in capital values.”
And that makes sense. For the vast majority of homeowners, the cost of owning a home does not vary month to month or even year to year, because these days most people make use of fixed-rate mortgages. So while taxes may fluctuate some, the cost in terms of the mortgage won’t change after they buy the home unless they refinance.
“‘Activity is just now returning to cities that experienced an exodus at the onset of the pandemic, and existing leases take time to reset every year.’”
It’s similar for renters. Most people who rent their homes will only encounter higher prices when it comes time to move or renew their leases — and even then, those who choose the latter option will typically see smaller increases in rent than those who relocate. As such, by nature, measures of consumer spending may downplay the increases in rents and home prices being seen more broadly.
The COVID-19 pandemic has…