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While overall inflation is trending downwards, the growing costs of homeownership and renting continued to be the main driver of inflation last month. That’s stretching Americans’ wallets and putting added strain on the housing market.
Shelter costs climbed a whopping 5.2% over the last year and 0.5% in August, accounting for over 70% of the total 12-month increase in inflation for all items excluding food and energy, according to Bureau of Labor Statistics data released Wednesday.
The shelter index includes rent costs and a metric known as owners’ equivalent rent, which measures how much money a property owner would pay in rent equal to their cost of ownership.
The continued inflationary impacts of the U.S. housing market suggests that there are still major issues in the sector overall, which is making Americans feel worse about the economy, said Shamus Roller, executive director of the National Housing Law Project (NHLP).
“I think that housing costs are underlying a lot of the economic anxiety that people feel,” he said.
Overall inflation rose just 2.5% in the past year, a considerable sign of cooling, and core inflation — all items less food and energy — came in slightly hotter than expected at 3.2%.
It’s not unusual for shelter costs to continue to barrel forward even as inflation in other sectors slow, according to Jason Pride, chief of investment strategy and research at private wealth management firm Glenmede.
“Shelter is one of the last remaining components running a bit hot, but it is a notoriously lagging component as it takes time for falling market rents to seep into the pool of existing leases,” Pride said in a statement Wednesday. “It would be reasonable to expect shelter to join the normalization theme in time.”
Despite the hot shelter inflation reading, the Fed recognizes the lagging nature of rate cuts and won’t hinge rate cuts on the figures, Pride said.
“Housing is one of the most interest rate sensitive sectors of the economy, so when the Fed tightens rates, it’s always housing that bears a lot of the brunt,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told Quartz last month. “As rates loosen, housing will be a beneficiary.”
Goolsbee said he hopes to begin to see progress on housing inflation over the next year. He warned, however, that the higher share of 30-year-fixed rate mortgages, as opposed to shorter-term contracts, will continue to make the effects of any improvements muted and slower coming.
The Federal Reserve is largely expected to carry out its first interest rate cut following the Federal Open Market Committee’s Sept. 17-18 meeting. Recent inflation figures have been promising, showing that inflation is well on its way to the central bank’s 2% target and all but cementing a smaller, 25-basis-point cut.
Homeowners — and people looking to become homeowners — are feeling the impact of still-hot shelter costs, with starter homes costing $1 million or more in over 200 metropolitan areas. This has made homeownership feel largely unattainable for average Americans.
In the second quarter of this year, the potential average monthly housing payment was approximately $3,500 — or almost half of the median U.S. income for the first-time buyer age group, according to estimates by NerdWallet
That payment includes the price of the home, an 8% down payment, the current mortgage rate, real estate taxes, homeowners insurance and PMI, or private mortgage insurance — a requirement for mortgages financed with less than 20% down.
Mortgage rates fell below 3% in late 2020 and early 2021, but have more than doubled in the last two years. And although mortgage rates have begun to drop and inventory is beginning to creep up, home buyers are hesitant to take the plunge due to a lack of affordability in the market. The median sale price of a home reached a whopping $438,837 in July, according to the most recent Redfin (RDFN-0.65%) data available.
On the seller side, many homeowners are still reluctant to give up low rates they locked in during the pandemic. Just 2% of homeowners surveyed by Bankrate in June said they would purchase a home this year at a mortgage rate of 6% or higher. The popular 30-year fixed mortgage rate fell to 6.29% last week from 6.43% a week prior, according to data from the Mortgage Bankers Association released Wednesday.
Renters are also feeling the burn. Across the U.S., median rent is $2,100 for all bedrooms and property types, according to online real estate marketplace Zillow (Z+1.75%). While these prices are well above pre-pandemic levels, rent is trending downward, falling $50 from last month and flat from a year ago.
Housing affordability has become a key issue in this year’s presidential election. Vice President and Democratic presidential candidate Kamala Harris has put forward a slew of economic proposals aimed at lowering housing costs, including tackling Wall Street home buying; offering $25,000 down-payment support for first-time homebuyers; ordering the construction of 3 million new homes over the course of four years; and putting limits on how much landlords can raise rents.
While Trump hasn’t put forward official policies on the housing market, he has suggested reducing regulatory hurdles to building new homes, using federal land for housing development, and more broadly addressing supply-chain issues.
According to Roller of the NHLP, until wages go up to compensate for rising housing costs, or the federal government intervenes, Americans are going to continue feeling the pain of the troubled housing market.
“The fact that inflation is going down — what that means is that things aren’t getting worse. It doesn’t mean that they’re getting better,” he said. “What it means is you’re still paying way too much for housing. Your rent still too damn high. Prices are still really high for first time homebuyers.”
Without a concerted effort from the White House and federal agencies, Roller said, lower interest and mortgage rates will do little to solve the housing market’s woes.
“It’s hard to solve a problem when you don’t understand that scope, and there’s nobody responsible for fixing it,” he said.