Thursday, December 2, 2021

Rising rents driving up inflation, spelling trouble for the Fed

Terrell McCallum, a personal wealth consultant in Dallas, spends a lot of time thinking about the markets and interest rates. He knows the Federal Reserve targets an average annual price increase of 2%, so it was a shock when he learned his rent would increase by 10% this year.

“I can afford it, but it’s on the verge of a financial burden,” McCallum, 33, said. He and his wife are saving for their first home, but now that they’re paying $1,830 for their apartment and fees, it’s going to be tougher than that. He tried to push back the growth, but the company he hires from doesn’t budge.

“He said: ‘That’s what the market is doing.'”

McCallum’s experience is resonating across the US, as rents rise after a brief pandemic recession, burdening homes and fueling overall inflation. That’s bad news for the Federal Reserve, as it could prolong today’s uncomfortably bullish price gains. It is also problematic for the White House because it hits households right in their pocketbooks, undermining well-being and increasing unhappiness among voters.

The boom in rent stems from a frenzy in the market for owned homes. People tried to buy as the pandemic took hold in the United States, often in search of additional space, but found that homes were in short supply after years of under-building following the housing crisis. Work stagnation, supply crunch and labor shortage have exacerbated the shortage of properties during the coronavirus era, all of which have prevented developers from ramping up production to meet demand.

As buyers bid up prices on single-family homes and condominiums, many people who otherwise gravitate toward homeownership find themselves unable to afford it, given the growing demand for apartments and home leases. Rents have been further pushed by larger numbers of people searching for places with more space and home offices during the pandemic, and as millennials in their late 20s and mid-30s seek more autonomy.

“People may be looking to move out and on their own after being stuck with roommates during the pandemic,” said Adam Ozimek, chief economist at online freelancing marketplace Upwork. “There’s also the possibility that remote working is playing a role here.”

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Government stimulus checks and expanded unemployment benefits also helped people save during the pandemic so they could afford to go ahead. Personal savings as part of disposable income popped up during the crisis, and while the stock has recovered to normal levels, it remains slightly higher at 9.4%, compared to about 8% just before the pandemic.

A combination of factors seems to have created a perfect storm that pushed the consumer price index up 0.5% between August and September, the fastest pace in nearly 20 years.

This is a concern for the Fed, as housing prices tend to rise slowly and once they go up, they stay up for a while. Rent data is also called “owners par rent” – which tries to put a price on how much owners would pay for the home if the home had not been purchased. Overall, housing measures make up about a third of the overall consumer price index.

Overall consumer prices jumped sharply in 2021, climbing 5.4% in September from the previous year. Fed officials are hoping and betting that the move is temporary, but they are carefully viewing the housing measures as a risk to that outlook.

In the minutes of the Fed’s September meeting released Wednesday, “several participants pointed out that the owner-equivalent rent component of the price index should be carefully monitored, as rising home prices could increase rent pressure.”

No less important is the fare for the Fed’s preferred inflation gauge, which it officially targets when it shoots for an average 2% annual inflation compared to the CPI. But it’s a big part of people’s experience with prices, so it can help shape their expectations about future cost increases.

Those expectations mean a lot to the Fed. If consumers anticipate rapid inflation, they may begin demanding higher wages to cover their rising expenses. As businesses raise prices to cover rising costs, they can set up an upward spiral. Already, some key measures of the inflation outlook — notably the New York Fed’s consumer expectations survey — have jumped higher.

The Fed is already preparing to begin slowing major bond purchases it is making during the pandemic to keep long-term interest rates low and keep money flowing around the economy. If inflation remains high, the Fed could come under pressure to raise its policy interest rate, its more traditional and more powerful tool. This can slow mortgage rates, cool the housing market, and reduce inflation.

But doing so will come at a great cost, slowing the labor market when there are 5 million fewer jobs than before the pandemic. So for now, Fed officials are putting themselves in a position where they can be nimble without indicating they’re ready for increased rates.

White House officials are also struggling with their options for easing the pressure on housing prices. President Biden’s economic agenda includes measures that would build more homes and discourage zoning rules that keep new construction at bay.

Such interventions will take time – houses are not built overnight. And in the meantime, rents will almost certainly continue to rise in the inflation data, reflecting rising housing costs over a long period of time. More up-to-date measures of rental pricing pressure produced by ApartmentList and Zillow have shown cost climbing in recent months, although many measures of rents and new leases have calmed somewhat after the red-hot summer.

The national average rent has risen 16.4% since January, ApartmentList said in its September rental report, with monthly growth slightly slower than its July peak.

“It’s still very strong by historical standards – we’re in the off-season,” said ApartmentList chief economist Igor Popov. “It’s a race car that slows down before a turn, but it’s still going faster than we did before in our lives.”

Whether rent growth accelerates or slows next year may depend on whether government support gives households the financial ability to afford housing, paving the way for a stronger job market.

“There’s definitely room to run,” Ozimek said, based on demographics alone. “The question is whether the economy is going to go into full employment, or is there a recession.”

Redfin chief economist Daryl Fairweather said the pandemic could warm rents in big cities, including New York and Los Angeles. While rental markets in smaller cities have been heating up for months, the average rent in Manhattan climbed in September for the first time since the start of the pandemic, data from Miller Samuel and Douglas Elliman showed.

The overall recovery in the New York area has been uneven as some families have moved to the city, bidding up prices, while others are struggling to pay, said Jay Martin, executive director of the Community Housing Improvement Program. which represents the landlords. Fixed accommodation mostly on rent.

“You have a war bidding for a unit, and then a renter who can’t pay,” he said. “The story of two cities happening within the same building.”

Drew Hamrick, senior vice president of the Colorado Apartment Association, a homeowners group, said the rent increase is driven not by landlords but by market factors.

“The landlords do not actually set the price; Consumers set the price,” he said. “These are musical chairs.”

Even if rents come down next year, today’s suddenly higher housing costs could make for a painful adjustment period. High rent costs can change through people’s lives and force them to make tough decisions.

Luke Martinez, 27, in Greenville, a city in East Texas, is considering buying a trailer and setting up his family on an RV lot after learning he’s missing out on the three-bedroom home he’s looking to buy for about $1,000. Taking on rent. per month since 2016.

“It’s crazy the amount of rent even in this small podunk town,” Martinez said.

He wants to pay up to $1,500 per month for a new location, which will be tough. After shutting down at the start of the pandemic, he was living partly on savings — padded by an insurance payment after his car was stolen and totaled. He returned to automotive repair work this week. His wife was working at the front desk at a hotel until two months ago, but is now home-schooling their 8-year-old.

If they end up renting at a higher price, they are likely to drop a new car to afford it.

“It’s pretty much just scraping,” he said of his lifestyle.

Nation World News Desk
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