People keep telling me the price of rent is falling. I keep doubting. The doubters have it correct again.
For the 18th straight month the price of shelter has risen at least 0.4 percent. For a year, analysts have predicted not just a slowing pace of increases, but falling prices.
Let’s tune into the BLS Report for the details.
CPI Month-Over-Month
- The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in July on a seasonally adjusted basis, the same increase as in June.
- The index for shelter was the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase, with the index for motor vehicle insurance also contributing.
- The food index increased 0.2 percent in July after increasing 0.1 percent the previous month. The index for food at home increased 0.3 percent over the month while the index for food away from home rose 0.2 percent in July.
- The energy index rose 0.1 percent in July as the major energy component indexes were mixed.
- The index for all items less food and energy rose 0.2 percent in July, as it did in June.
- Indexes which increased in June include shelter, motor vehicle insurance, education, and recreation.
- The indexes for airline fares, used cars and trucks, medical care, and communication were among those that decreased over the month
CPI Shelter
Shelter Notes
- Shelter comprises 34.73 percent of the CPI
- Rent of primary residence is standard rent (not owner occupied), unfurnished without utilities.
- Owners’ Equivalent Rent (OER), is the estimated price one would pay to rent one’s own house, unfurnished and without utilities. It is the single largest CPI component at 25.54 percent.
- The shelter index increased 7.7 percent over the last year, accounting for over two-thirds of the total increase in all items.
CPI Year-Over-Year
Year-Over-Year Details
- Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.
- The all items less food and energy index rose 4.7 percent over the last 12 months.
- The energy index decreased 12.5 percent for the 12 months ending June
- The food index increased 4.9 percent over the last year.
- Motor vehicle insurance increased 17.8 percent from a year ago.
- Shelter is up 7.7 percent from a year ago.
Leading Indicators
Sorry folks, as I stated last month, rent prices are NOT coming down, despite such reports for over a year now.
If 57 of the 100 largest cities in America had declining rents, the BLS would reflect that. I will accept that the price of new leases is falling, but most renters do not move.
Would you move to save $50 a month? $100? It’s not worth the hassle unless the new place is cheaper, nicer, and more convenient.
Most analysts have been expecting the price of shelter to come down.
I have not been in that camp and still aren’t although we are getting closer to smaller increases.
The idea that the price of new leases leads the way has certainly not lived up to its deceleration billing.
What About Supply?
The Starter Home Is No More, Even in Second Tier Markets
In 100 of 100 markets, the average renter cannot afford a lower tier house.
Powell is waiting, and so are renters, because homes are miserably unaffordable with the average mortgage rate of 7.04 percent according to Mortgage News Daily.
For discussion, please see The Starter Home Is No More, Even in Second Tier Markets
Until the price of homes crash, or prices steady and mortgage rates crash, those looking to buy an affordable starter home will be out of luck.
This has widespread implications for household formation and the economy. Many people are trapped into renting, even when they want out.
Does Fed Policy Help?
It’s debatable if rate hikes will do much for shelter, at least the way the BLS and Fed view things, because home prices are not directly in the CPI.
Higher rates will slow the pace of new construction, and its finished construction that will add to supply and possibly pressure rent prices.
The price of a new leases are falling because of the added supply, but existing leases are stubborn. Meanwhile, landlords have every reason and incentive to keep hiking rents and have done so, despite reported claims to the contrary for months on end.
The supply of existing homes is extremely tight because people do not want to trade a a 3.0 percent mortgage for a 7.0 percent mortgage. And potentially millions of people want to buy a new home but cannot because they cannot afford these high interest payments.
The Fed created this housing mess by not factoring in home prices into its inflation model.
Like homeowners who want to move but can’t, the Fed is also trapped into a problem of its own making. The Fed wants to reduce demand, and has done so, but simultaneously, the Fed is reducing supply of new houses. The latter acts to firm rent prices.
The first inflation increase in 12 months. The Fed had a mathematical headwind, dropping higher inflation numbers for lower YoY. Now the math is inverted. Add higher gas prices, increasing home values, higher wages. And the spiral begins. The Fed jawbones about quarter point FFR increases, while repurchasing their balance sheet, supporting longer rates.
With toilette paper at $1/roll the Korean store is doing a booming business in bidets. Airline pilots union refused a 40% pay increase over 4 years. UPS trucker/delivery boys got a $170,000/year pay package. Pretend inflation may be 3%/year but the dollar is toast. International competitive currency devaluations hide the carnage until you shop for a widget. It’s gnarly out there. Demand and price for LuLu Lemon try me suits have never been higher.
Mish, help me with this. Professor Cam Harvey at Duke Business School (who I respect) claims the Fed doesn’t “get” how housing prices have a 6-8 month lag in the CPI and therefore the economy is already on a path towards 2% (he said this before the last rate hike I believe, on Bloomberg). Thoughts?
Again, someone explain to me ho rising rates will make the cost of rent go down, when common sense suggests it will likely be the other way around. The sooner we end this idiocy of monetary policy, the sooner we will save the economy.
They won’t except in the made up world of John Maynard Keynes.
Simple demand destruction.
Keep cranking rates upwards, and fewer and fewer can a)afford to bid up prices for anything, including rent. While b)more and more owners will be liquidated, flushing their inventory out on the market. At lower prices, since noone can afford to borrow much at high rates.
More technically: 1) In a fiat-money dystopia like ours, money is created by debt. 2) the higher rates are, the less debt any given “economy” can service. Combine the two, and: The higher rates go, the less money will be available to bid for/demand goods and services; including rent.
At the same time, higher rates won’t magically cause housing units to disappear into thin air. So: Supply will stay the same.
Now, you have less demand (from less money), but the same supply (same stock of housing units). And less demand for the same supply, requires lower prices to clear/reach equilibrium.
For the markets we follow as a commercial real estate firm with $5 billion or so under management, we see rent changes all over the map. Pacific northwest was declining for several months, but recently began increasing again. Big supply increases in SW Florida are creating asking rent declines month over month. On balance, it’s really hard to benchmark but it looks like rents converging toward normal 2-3%-ish rent growth. It’s very localized even within a single metro area. The data by the way come primarily from direct data feeds from anonymized individual property asking rents and direct property surveys. Rents as we see them have historically grown at above inflation (inflation+1% or 0.5% ? ). Declines in true inflation? Absolutely. Declines in the official inflation metric? Eventually, given the way it’s calculated. Outright declines in nominal rent? Only in some markets and submarkets. On balance, tough to say but we lean toward no declines for a while. The current construction inventory is delivering slowly, and has to come on line in force before you see that. It’s possible in maybe a year.
re: “The Fed created this housing mess by not factoring in home prices into its inflation model.”
There are shortages in housing, labor, food, and energy.
And much of the price of new construction is determined by development restrictions or by local and federal governments. I.e., an injection of money is not neutral. It is driven by the Cantillon effect.
And the CRB commodity index is rising:
link to tradingeconomics.com
Florida has the least affordable housing to personal income ratio in the nation. And we are a state which is pretty much flat as a pancake and every level of government approves new development as fast as they can. New homeowners can easily spend $1500/month just on taxes and insurance. I’ve read Mish for probably a decade now, and used to laugh at him for complaining that he was dropping $14k/year in taxes in Chicago. Well, Florida’s there now. And the heat index in East Central Florida is a balmy, humid and sweaty 114 today. Think I’m going to move to Utah next to Mish. I figure he’s done all the research. My only qualm is I enjoy me beer and whiskey, and I’m not sure how those Utahns might feel about that…
The folks living in on the low ground in Florida are gonna continue to have a bad time, until eventually their homes become uninhabitable.
This will be attributed to Joe Biden’s marxofaschiwoke weather machine.
Cant compare Florida with illinois. There is zero income tax in Florida. Excise taxes are much lower and the state is not bankrupt like the land o’ Lincoln.
Of course, since i live on the gulf coast i cant even insure my home anymore but hey that is what you get for living on the beach…..
Hard enough to compare Florida to Illinois but supposedly PPP lets us compare the US to China
If you like your beer and whiskey, why not move somewhere like Tennessee?
Cost of living is lower than Florida, you get 4 seasons, no hurricanes or earthquakes etc and they like their Whiskey.
Mish moved to Utah because he’s a photography buff and wanted to hike national parks and take pictures.
And Tennessee has Nashville!
Theres a million things working against cheap housing:
1) Rising insurance (my Allstate in Chicago went up 33% this year)
2) Rising property taxes (a lot of it going to pensions for retiring cops, firemen and teachers, who weren’t paid minimum wage in the first place).
3) Rising interest rates, which increase adjustable mortgages and make it unlikely anyone is gonna give up a 3.5% mortgage for a 7% mortgage.
4) Continued taking of America private, where billion dollar hedge funds and private equity buy up everything with low interest money, including apartment buildings, businesses (NYSE cut in half from 20 years ago), stocks, bonds, and HOMES.
5) Increasing population, with 50 year olds increasing in number and hitting “the most money they will ever spend” ages (Harry Dent)
Why on earth would you live in Chicago?
As it gets to be 130 degrees every summer in the south, I’d ask why anyone WOULDNT live in Chicago.
Heyjackass.com will show you why.
Heyjackassdotcom will tell you why.
Rising costs of insurance and property taxes are passed along to the renters.
Ergo, a non-cheap housing environment. Real the whole thread first.
Time for my monthly compound inflation report.
CPI is calculated Annually to minimize the appearances of a devaluing currency. If July 2023 CPI were calculated Biennially it would be 11.97%, stating that prices are 11.97% higher than in July, 2021. This is a .4% rate drop from last months biennial CPI of 12.37% but is still an increase in prices. If July 2023 CPI were calculated triennially, it would be 18.01%, stating that prices are 18.01% higher than in July 2020. This represents a .43% rate drop from last months 18.44% triennial CPI figure. . PRICES ARE STILL GOING UP!!!!
CPI does not truly reflect the sky rocketing prices of necessities. CPI often minimizes the true affects of inflation for political reasons and to lower COLA increases for Social Security and Public Employee Pensions.
Once again inflation is not simple inflation but is compound inflation. Triennial Compound CPI is 11.89% greater than FED targeted 2% CPI goals for this same 3 year time period.
It would take nearly 6 years of ZERO PERCENT CPI to arrive at what the FED’s targeted 2% CPI would have produced with July 2020 as the base month. I call this important number the “ZERO PERCENT CPI NEUTRAL AFFECT ADJUSTMENT INDICATOR”.or ZPCpiNAAI for short, .HaHa.
Unregulated Non Banks have taken borrowed money that was too cheap to pass up and used it to financialize our economy through speculation and stock buybacks rather than capital investment. It is estimated that 5% of GDP is spent on stock buybacks rather than wages, factories or infrastructure. Corporations borrow money for stock buyback with the intent of stabilizing stock prices when insiders with stock options cash out.This greed does absolutely nothing for humanity.
Much of inflation is speculative, and non productive. Whatever it takes to remove the speculative component out of the equation, and enhance the productive component in our economy is in order. The FED is reigning in unregulated Non Banks by raising interest rates, and making the price of greed more expensive. Keep up the good work.
Boom times are when society leverages borrowed money and lives beyond its means. Recessions are when society lives within its means. Boom times and inflation only benefit those with access to borrowed money first, everyone else suffers.
It’s obvious that the CPI is flawed as a measure, given the political games that incentivize softening the numbers by a good margin. However, have you been following the TMS or True Money Supply? The money supply has been shrinking significantly over the last year or so, but it pales in comparison to the “printing” that has occurred over the last 14 years. Usually when the TMS tanks, we normally get a recession at some point thereafter. 2009-2022 basically brought us ZIRP or close to it, now the FED has no choice to but keep interest rates at 4-5% for a prolonged period of time, which despite what we’ve been lead to believe by CNBC, are actually normal rates. I don’t think we are going to see ZIRP like we saw during the GFC.
I’d expect quite a few startups and other young, self-proclaimed “geniuses” to be swallowed up over the next 1-2 years as the easy money IV is nowhere to be found. We’ll be seeing a nice flushing out of services and/or entrepreneurs that could have only existed with access to “easy money”. I’m hoping the larger economy won’t be affected as a whole, but I can see startups, housing (to an extent, given the stricter lending practices), and tech being taken for a dive over the next couple of years.
Agreed.
My BCBS health insurance is going up 14%. I seriously doubt that the BLS CPI bean counters will admit that health insurance is rising more than their “3.2%” happy talk.
You and your fancy health insurance… The Founding Fathers, Lewis and Clark and all the Pioneers did just fine without it. Real Americans rub dirt on it and walk it off!
Health insurance inflation (as they measure it at least) is roughly 9% of the medical expense inflation component of CPI. It’s imputed based on an earnings estimate and not measured directly (nor should it be given how insurers price – you’d have a lag like the one that exists in the housing CPI component.)
Dont forget college costs. Economic politburo manges the numbers to fit their narritive and goals.
College costs are interesting. Private schools and the “Ivy League” schools have ballooned to the point of no return. Juxtaposed against state and community colleges however, the latter have seen relatively muted increases.
I’ve seen more than enough about-faces from alumni at these higher end schools that go to these schools to become traders or go into PE/IB who end up hating their lives. Some try to make career changes several years into their professional lives. A school like Georgetown these days will run you a cool 75k a year for undergrad, but that doesn’t include food, textbook costs, transportation etc. So, you figure that number jumps to 85-90 a year once everything is settled. At the end of 4 years, that’s 360k down the drain in the hopes of getting a high paying job on WS. If you hate your job or aren’t good at your job working in one of those lucrative fields, you’re out of luck. Assuming you don’t have wealthy parents that are footing the bill, you’re saddled with so much debt for nothing.
Jobs that require technical skills will not hire a Harvard or Georgetown grad because of where they went to school, unless they majored in engineering etc… So, you eventually has a kid that’s stuck up to their eyeballs in debt and may even have to go back to school.
I’d expect most of these higher-end schools will have issues somewhere down the line precisely because of this problem. There’s too many cheap(er) alternatives.
Our health insurance increased 34% in January 2023. I’m expecting a large increase for 2024. We have a $3,000 deductible. Everything is subject to deductible. It’s a High Deductible Health Plan.
“It’s obvious that the CPI is flawed as a measure, given the political games that incentivize softening the numbers by a good margin.”
Yes, that pig has had so much lipstick applied that it is now larger than a whale shark.
The bean counters invented hedonic adjustments to kick inflation back into shape.
They still haven’t figured out how to apply it to rents, but are working on it.
“It would take nearly 6 years of ZERO PERCENT CPI to arrive at what the FED’s targeted 2% CPI would have produced with July 2020 as the base month.”
4 years of 0 percent CPI.
Triennial CPI at a FED targeted 2% rate would be 6.12%.
Actual Triennial CPI is 11.89% higher at 18.01%
6 years of FED targeted 2% CPI going forward from today would generate prices 12.61% than they are now. The 11.89% number is very close to the 12.61% number
I’m a Doctor, not a statistician.
I welcome corrections to my numbers, but I am still going with the 6 year figure.
correction:
6 years of FED targeted 2% CPI would generate 12.61% higher prices. The 11.89% number is very close to the 12.61% number.
So we would need 6 years of 0% inflation to correct the last 3 years drastic run up of prices according to FED purported targets.
“Boom times are when society leverages borrowed money and lives beyond its means. Recessions are when society lives within its means. Boom times and inflation only benefit those with access to borrowed money first, everyone else suffers.”
And recessions harm everyone. So I’d take the borrowed money and living beyond my means any day of the week.
You make a compelling point…
Why do recessions harm everyone? Most people retain their jobs / businesses, some even get raises in a recession.
Those who aren’t in debt and retain their jobs / businesses should do even better than normal.
I have made a crap load of money from every single recession because they all present opportunities for the nimble. Having said that, I never “hope” for a recession, like so many here. Because I can make money when the economy is growing too.
Nothing like the high of economic heroin. As long as the buzz lasts
“And recessions harm everyone.”
No they don’t. By now, considering how extreme the dislocations have gotten, they harm virtually no one. They do harm those who are illiterate, incompetent and close to The Fed, though. Which is why the uncritical indoctrinati, is being told, over and over ad nauseam, to mindlessly regurgitate that “recessions are baaaaad.”
What causes economic harm, is economic misallocation. Just that. Noting else. And economic misallocation is what you have, definitionally, every single time you print another dollar out of thin air. Every.single.time. Not yes-but-mommy-diiiiiiferent. Every.single.time. Without any exception.
And the only cure for the cumulative harm thus caused, is “unprinting” every single such dollar. For every single dollar printed, all the way back to $20/oz from then until forever.
Lots and lots of recessing to be done there, before you’re even in the general zipcode of possibly overdoing it and causing harm.
The reason so called “recessions” appear to cause “harm” to many/most; is the infinitude of, always and everywhere, idiotic and destructive gyrations gone through in order to ensure “recessions” only harm the non-idiot, non connected.
Instead of doing what recessions would do in any free society and market: Bankrupt the beneficiary idiots and all they own and have. Along with every structure and institution built on top of the unbacked printing. Again, without any exception.
Currently, so called “recessions” are treated as simply yet another excuse to bail out and “save” existing malinvestments and misallocations. Since, after all, such malinvestments are invariably “owned” by by the exact net-negatives who have no other talent than living off of loot stolen from productive others by The Fed and Government. So, to save that rabble from what would be the consequence of being exactly such rabble and nothing but: “Interest rates must be lowered”, “loan guarantees” put in place, “support” offered , “ownership” protected blah, blah. Which, again always and everywhere without any possible exception, serve no other purpose than prolonging and perpetuating the misallocations, as well as ensuring that the idiots who misallocated in the first place, will retain the wealth to continue doing so in the future
All paid for by the tooth fairy, according to idiots dumb and gullible enough to still believe there is anything whatsoever worth “saving” about any current day institution in America. Which there, of course and obviously so, hasn’t been since at the latest 1971.
In reality, all of that “saving” is; because it has to be; paid for by the only ones who still create something of genuine economic value. As opposed to nothings living off of rents, asset pumping, “mandates” that others pay them, and cuts of all the transactions making up the above. Those productives are hence so buried in costs, they are unable to produce much of anything anymore. And literally nothing competitively. Even against competition as clueless as a bunch of five year planning communists.
In sum: A proper free market recession, left to run it’s course, would harm virtually noone. Since virtually all debt would be wiped out, and virtually all “assets” bought by that artificial debt, would be flushed out and redistributed away from the current bottom-of-the-barrel nothings who have been handed it all to misallocate-and-nothing-but, ad infinitum. Hence, less cost and less misallocations. Hence competitive and economic improvement. Which is harmful exactly nowhere.