Rising Rents Threaten to Prop Up Inflation

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Kaitlin Cindrich faces a $ 200 monthly rent increase this August if she and her husband can extend their Provo, Utah, lease. She didn’t expect that 25 percent jump, and the 21-year-old fears that because of her autoimmune disease, she will have to skip medical appointments to keep up with payments.

Still, she admits that there is no choice but to pay more. “We hope that we can stay because everything is so expensive at the moment that I would pay the same here or elsewhere,” said Ms. Cindrich.

The rental market, which slumped during the pandemic, has declined faster than many economists predicted, and renters across the country are facing sticker shock. When the pandemic broke out, many people who had lost their jobs terminated their leases to temporarily live with parents or roommates. Others fled major cities for health reasons. The apartments were empty and landlords began offering incentives such as a free month to attract tenants.

Now that people are moving out alone or returning to cities and office jobs, and existing tenants find they can’t afford it in a booming housing market, demand for apartments and single-family homes is recovering – and even looking hot in some places. According to Zillow data, rents across the country rose 7 percent last month year over year. Measured against a weak June 2020, the increase was also a robust 1.8 percent compared to May.

“After a year, jobs are coming back strongly, and this is driving demand for rental units and increasing occupancy,” said Lawrence Yun, chief economist for the National Association of Realtors.

If rents continue to rise, it could be bad news for both home hunters and the country’s inflation outlook. Rental costs play a dominant role in the consumer price index, so that a significant increase could help the carefully observed state price scale, which has risen sharply, to remain higher for longer. Rents are only about half as important to the Federal Reserve’s preferred consumer spending inflation index, but a long period of high CPI inflation could affect consumer expectations of future price increases, which in turn could accelerate them.

Consumer prices soared 5.4 percent in the year through June, but much of the increase was due to the reopening of the economy after the pandemic. Fed and White House policymakers have argued that as the economy returns to normal, one-off problems that are driving up used car prices are resolved, and demand begins to spill over the furniture industry, today’s heavy price pressures should ease. and washing machine costs skyrocket.

However, this is where the housing costs could start. Units of measure of rent and so-called “owner-equivalent rent” – which uses rental data to try to price how much owners would pay for their home if they hadn’t bought a home – make up almost a third of the consumer price index. Both tend to move slowly but defy expectations that it would take them time to recover.

“We’re seeing owner rents go up pretty steeply,” said Alan Detmeister, an economist at UBS and a former Fed employee. “I expect it will get worse later this year and early next year.”

He and other economists said it was too early to say how far and for how long rents would support headline prices.

“I think we’re going to see some upward trends in rents, and that will offset some of the declines in commodity categories,” said Michelle Meyer, director of US economics at Bank of America. But rents rise “only” in order to keep inflation uncomfortably high, “if wages are permanently higher”.

How much landlords can charge depends on how much the tenants can afford. Low paid workers are seeing sharp wage increases, but many economists expect these to decline as the economy reopens.

Another important factor, Yun said, is whether “builders are active to deliver new homes and apartments to meet this rise in rents.”

Daily business briefing

Updated

July 22, 2021, 10:52 a.m. ET

The data suggests significant new housing supply should be on its way this year, but it is unclear whether it will keep up with demand in location and timing.

At the moment, the rental experience differs from market to market. Rents have risen rapidly in places like Boise, Idaho; Spokane, Washington; and Phoenix, while the big cities lagged behind on the coast, based on Zillow data. Rents in New York City and San Francisco are recovering quickly, but remain cheaper than two years ago.

In New York, “the rental market has been crushed,” said Jonathan Miller, general manager of Miller Samuel, a local real estate appraisal firm. But the pace of new rentals over the past three months, with tales of bidding wars, has reversed this. Miller expects rents to recover fully as companies bring workers back to offices and move them back from far-flung, remote work locations this fall, he said.

“There will be another wave,” he added. “We have just passed the peak zoom.”

Data from Apartment List, a listing site, confirms the trend visible in the Zillow numbers: In 2021, rental prices rose by 9.2 percent nationwide in 2021, compared to the typical 2 to 3 percent from January to June. According to the latest available data, prices have been higher than Apartment List economists would have expected given persistent prepandemic trends.

“In the short term, prices will continue to skyrocket because occupancy is currently sky high,” said Igor Popov, an economist at Apartment List. He said that as supply increased, price gains should weaken, but it was unclear when that would happen.

In the meantime, the hot housing market should keep rental demand strong.

“Rents are a lagging spouse to house appreciation,” said Nela Richardson, chief economist at employment data provider ADP, who previously worked for real estate company Redfin. “They have a chronically underserved housing market and have been for a decade. That won’t go away. “

Higher rental costs can have a huge impact on people’s lives. Christine Gitau, 23, of Homewood, Ala., Is returning to her parents’ home for unable to afford the $ 100 increase to extend her lease on the $ 530 apartment she started last July can.

“I’m very frustrated, angry and stressed about the rent increase,” says Ms. Gitau.

Ms. Cindrich in Provo, a full-time student at Brigham Young University, worries that she will need to apply for more student loans to pay for her home or cut expenses in other areas.

“I have a serious autoimmune disease and spend hundreds of dollars on medication every month,” she said. “The rent increase likely means I may not be able to go to my monthly doctor appointments.”

This human influence makes rising rents a political challenge, especially when the Biden administration is already fending off attacks by the Republicans over the surge in inflation.

Administration officials say they are watching house prices and their impact on inflation. They continue to insist that price pressures in the economy are mostly temporary.

Officials and President Biden himself have also pushed for additional spending measures that would increase housing supply over time and, officials say, curb rent increases, house price hikes and inflationary pressures.

Mr Biden’s $ 4 trillion economic agenda includes $ 213 billion to boost affordable housing. These efforts weren’t included in the bipartisan infrastructure deal he had with the centrist lawmakers, but they could, at least in part, end in a standalone spending bill that the Democrats plan to propose to Congress this summer.

Even if successful, it would take years for those efforts to bear fruit.

Some, like Dr. Popov, expect the recent gains to slow down on their own this year. Others said bigger hikes could be imminent: many consumers are overflowing with the money from government stimulus checks, and the Fed’s cheap lending policy is fueling the housing market.

“There is a tremendous amount of incentive and I think that has the potential to put upward pressure on rental rates,” said Miller, the appraisal director.