Most economists thought year-over-year rent inflation would have come down more than it has. Let’s investigate what they have to say now. 
The Wall Street Journal comments Stubbornly High Rents Prevent Fed From Finishing Inflation Fight
Stalled inflation this year hasn’t derailed the Federal Reserve’s plans to eventually cut interest rates. That’s because it expects a slowdown in housing costs to eventually drag inflation close to its 2% target.
The problem: It has been waiting for that slowdown for 1½ years now, and it still hasn’t arrived. [actually at least two years but who’s counting?”
Market rents—rents on newly signed leases—surged three years ago, reflecting the unusual demand for more space unleashed by the pandemic, strong income growth and historically low inventories of homes for rent or purchase. Single-family home rents rose 14% in 2022, according to CoreLogic.
Because only a minority of leases turn over each year, changes in market rents are reflected in inflation with a lag. Accounting for that lag, Fed officials, Wall Street investors, and private-sector economists have expected housing inflation to slow since late 2022 based on what has already happened with market rents. [I have been harping about lease turnover for the same two years, and yes, I have been counting. It’s why expectation of soon to be falling rent have been dead wrong.]
Housing inflation has indeed slowed from a peak of 8.2% one year ago—but only to 5.6% in March, “a much slower pace than pretty much anybody anticipated,” said Jay Parsons, head of residential strategy at Madera Residential, a Texas-based apartment owner. [Anybody does not include me]
Housing “has not behaved the way we thought it would,” Chicago Fed President Austan Goolsbee said in an interview last month. “I still think it will, but if it doesn’t, we’re going to have a hard time” bringing inflation back to 2%.
The ‘last lag’ or the last mile?
Many economists still think it’s only a matter of time before housing inflation reflects the slowdown in new leases that began two years ago. It might be taking longer than expected because more renters are renewing their leases instead of buying a home, deterred by high mortgage rates. That could lengthen the time it takes for lower rents from newly signed leases to show up in overall inflation.
“I still think that check is in the mail, but unfortunately, it’s taking longer for that check to arrive than I anticipated,” said David Wilcox, an economist at Bloomberg Economics and the Peterson Institute for International Economics. “I just don’t see an alternative outcome other than those low lease rates eventually manifest themselves in the official price indexes.”
Higher car-insurance costs or hospital-service prices, for example, reflect big increases in auto prices and hospital wages two years ago, respectively, said Omair Sharif, founder of research firm Inflation Insights. “It’s the ‘last lag’ story, not the ‘last mile’ story,” he said.
“One of the surprises of the last six months, specific to multifamily, has been the reacceleration of demand,” Parsons said.
At Camden Property Trust, a Houston-based owner of 58,000 apartment homes, the share of tenants moving out to buy homes has fallen to 9%, the lowest in the company’s three-decade history and down from a traditional move-out rate of 15% to 18%.
“Most folks believed you would have had a massive falloff in rental growth throughout the Sunbelt,” said Ric Campo, chief executive of Camden. “But what’s happening is there’s been just a whole lot more demand than most people expected.”
Hoot of the Day
Please note the nonsensical title of the WSJ article “Stubbornly High Rents Prevent Fed From Finishing Inflation Fight”
The Fed does not fight inflation, the Fed purposely causes it.
More Demand Than Expected
What role did millions of illegal immigrants have on demand? Most of them have little money, but they have to stay somewhere.
Share of People Moving Drops to 9 Percent
According to data from the U.S. Census Bureau, moving rates for Americans declined from 12.8% in 2021 to 12.6% in 2022.
But what is it for 2024?
My guess has been 9 percent in a range of 8 to 11 percent or so. But we will not know that for two more years.
Moving Expectations
A New York Fed survey shows 1-year and 3-year look ahead moving expectations are at record lows.
Probability of Renters Buying a Home
Probability of Renters Buying a Home
- Twenty-five percent of renters have essentially given up on the idea of ever owning a home.
- The median expectation is a mere 35 percent.
- The average expectation is 40.1 percent.
All of those are record lows.
Trapped In Your House?
I discussed moving expectations in Trapped In Your House? Moving Expectations Hit Record Low
Some people replied moving expectations have been falling anyway. Yes they have, but expectations fell from 20.8 percent in 2014 to 16.4 percent in 2022, a decline of 4.4 percent in eight years.
In the next 2 years, expectations fell another 3.0 percentage points. Might I suggest home prices are in play?
Bear in mind, these are expectations, looking ahead one year. How many actually moved? 8%? 9%? 10%?
Methodologies that overstate new vs existing leases understate inflation.
Rent Prices Rose for the Third Straight Month According to Apartment List
Rents were not falling as reported recently by Apartment List. Nor are Apt List estimates correct now. Let’s discuss what’s really happening and why Truflation is wrong as well.
Rising rent prices was the subject in one of my posts earlier today.
Please see Rent Prices Rose for the Third Straight Month According to Apartment List
Truflation uses Zillow, Trulia, Redfin, Apartment List and CoreLogic. It claims “Our methodology for calculating rental price changes incorporates both new rental agreements and rental renewals, which provides us with a balanced view of price changes over time.”
But Zillow, Redfin, and Apartment List all have a huge flaw. They only capture new leases when only about 9 percent of the people move each year.
Comment From John Burns
I asked John Burns, CEO of John Burns Research and Consulting, LLC “What do you make of reports that rents are falling or soon will?
He replied “Rents are falling in some of the markets below, and rising elsewhere.” The list where “some” but not all are falling includes Charlotte, Austin, Raleigh, Phoenix, Nashville, Charleston, Salt Lake, Jacksonville, Denver, and Dallas.
Lags Kick in When?
The price of rent has gone up at least 0.4 percent for 31 straight months. I finally sense we are approaching the end of these big jumps.
Not Leading Just Wrong
Lagging turned out to be more lagging that some thought.
Aptartment List had M/M Oct, Nov, and Dec of 2022 at -0.9%, -1.1%, and -0.9%.
This is not leading, it is just wrong. Averaging that data in, with equal weight, if that is what Truflation did, is also wrong.
Wrong About What?
By wrong, I mean wrong for purposes discussed here.
The average person looking for a new apartment does not care one hoot about seasonal adjustments.
For the actual purpose of the Apartment List website, helping renters find places and what to expect, reporting without seasonal adjustments makes sense.
However, it does not make much sense for Truflation to give anything but zero weight to Apartment List.
The “administered” prices (oligopoly, monopsony, and monopoly elements) would not be the “asked” prices, were they not “validated” by M*Vt, means-of-payment money X’s transaction’s velocity, i.e., “validated” by the world’s Central Banks.
Bernanke, pg. 287 in his book “The Courage to Act”, “Lower long-term rates also tend to raise asset prices, including house and stock prices, which, by making people feel wealthier, tends to stimulate consumer spending” (aka the “wealth effect”).
Economists are a Pollack joke. The NY-FED took down their explanation of the money stock on its web site and its historical impact on the economy. They replaced it with a watered-down explanation.
Since the lags for (1) monetary flows, & (2) “costless” legal reserves, are synchronous & indistinguishable, economic prognostications (using simple algebra), are infallible (for less than one year).
-Michel de Nostredame
I have linked this ProPublica once before on a previous Mish post, but I will link it again for those that may not have seen it. It describes a computer algorithm that landlords can apply to set rents. The basic premise is that the algorithm suggests to keep a unit vacant until the landlord can get the price he is asking for, rather than lower to rent to attract a tenant.
https://www.propublica.org/article/yieldstar-rent-increase-realpage-rent
Basically these are just price optimizers (like in the airline industry) that weigh various trade-offs between higher rents/lower occupancy and the reverse in order to maximize total revenue (and which use historical apt complex-specific data and (maybe if certain allegations are true) borderline illegal sharing of data across “competing” complexes).
But the underlying apt supply and demand are what they are.
The real mysteries are why so many “started”/”under contstruction” apt units (per Census) don’t seem to ever end up “completed” (leading to supply shortfalls) and the *very* weird explosion in household formation (way, way higher than preceding years and given demographics) in 2021 and 2022…despite soaring rents.
Reading the article it looks like the main use of the software is to assist landlords in setting rent prices. Adjusting the vacancy rate seems more on the margin. In the example given, a complex went from a 97% occupied to 95% occupied to optimize revenue. So while there was increased vacancy, it was not by a lot. Remember that a vacant apartment is one which doesn’t earn the landlord any money.
A friend of mine that used to own lots of property claims that at a certain level, occupancy rates are-at best- a secondary consideration for most in that position. According to him it’s all about the leverage.
Housing “has not behaved the way we thought it would,” Chicago Fed President Austan Goolsbee said in an interview last month.
Cram 7 million illegal aliens into the country, they have to live somewhere. California lost over 500,000 legal residents. A recent story said that the influx of illegal aliens has erased that deficit. How can Goolsbee ignore an elephant in the room?
There is no doubt that 30 years of DC human trafficking and very selective enforcement of laws is playing a role on the housing demand side.
But who is the MSM meat-puppet that would dare speak the obvious truth?
The illegal aliens who have been ‘visiting’ us are having living quarters being paid for largely by the Federal Govt. When has the FG ever negotiated lower payouts when they get free money (mainly from ME it seems)? This too is contributing to the rising rental and housing prices.
America is a rich country. We have the world’s finest printing presses. Yet I always am puzzled that if we can just print money, why am I still paying taxes? It must be me….
Immigrants add to rent pressure by increasing rental unit population. Maybe 5-7 people in a unit. One signs the lease, the rest pay them for a room or a couch, or they’re family.
This also adds pressure on units. The most successful person in the apartment would stay there if it wasn’t so crowded. Instead, the crowding encourages them to find their own place or rent with one other person.
Anyway, it should be obvious that adding people faster than you add housing units will create pricing pressure. The exact mechanics just help understand how much pressure.
Anyone advocating for immigration needs to also advocate for reducing regulations for housing permitting and construction.
Retiree here. Rather than being trapped in my house when I retired, I bought another one and rented out the first. That worked so well that I bought a third, and then a fourth. And then I bought a small estate in Brazil to live on.
Housing (at least outside of Democratically controlled cities) is the last great hedge against inflation, the one place where the government cannot lie about what is happening and cannot print more.
My rents have still not caught up with the covid lockdowns. I have sympathy for my tenants. Unfortunately, the local taxes keep marching up, the insurance keeps marching up, the cost of repairs keep on marching up, so I am still being forced to raise my rents further just to stay even…….
p.s. Mish please, please stop blaming the Fed ….the problem is Congress and the President, they are the ones doing all the reckless spending…….
“ the last great hedge against inflation, the one place where the government cannot lie about what is happening”
But as you mention in passing, the G can hike the property taxes on your very illiquid, highly leveraged RE to infinity and beyond.
Or loosen excessive residential zoning that creates artificial housing scarcity.
And fully fed up renters can decamp for remote work or simply follow equally fed-up employers decamping for sunnier, less strangulated climes.
Residential real estate has sorta, sporadically worked an investment for 20 years (except for that big-ass collapse) but it is also a highly immobile hostage to fortune.
Stop blaming the Fed? The Fed creates the currency. If the Fed quit monetizing the debt and agreeing to step in every time the debt market has a hiccup, these shenanigans would come to a spectacular crashing end. If the market set the proper interest rate for loaning to a government as indebted as the US and going in debt another 5-10% of GDP every year, the government quickly would no longer be able to borrow. But the Fed enables the reckless spending to continue. The piper must eventually be paid, but the Fed’s job is to keep kicking that can down the road.
Some of us are tired of the Fed enabling the government to loot the public through the back door. The growth of government since the creation of the Fed in 1913 has been massive, and the government never shrinks. The only way the massively parasitical government gets cut to size is when they can no longer print themselves wealth.
Biden can take all of the cardboard boxes containing munitions and material sent to fight overseas wars and give them out for free to the populace who can then live rent free in beautiful only slightly used cardboard boxes. Boom, housing inflation finished. Now that’s equity!
I don’t understand why economists are so darn perplexed by why rents are still going up. The answer is very simple… rents are a function of the price of the asset being rented and the rise in the cost of those assets has been larger than the rise in rent (especially when you take into consideration the higher interest rate required to finance said assets).
In many, many US markets, the buy vs. rent calculation has been totally flipped on its head in the past few years and it’s now far cheaper to rent (by a lot) than to buy (as opposed to historically it being a bit more expensive to rent than buy) in a wide swath of regions. As long as this unusual situation persists, rents have plenty of “runway” to keep rising. It ain’t that complicated folks, really.
“ it’s now far cheaper to rent (by a lot) than to buy (as opposed to historically it being a bit more expensive to rent than buy) in a wide swath of regions”
All true…but that isn’t to say that either form of housing is *affordable*.
Thus the very pissed off population.
20 years of Fed f*ckery-pokery via ZIRP simply deranged the price mechanism involving home buying (and, now, relatedly, apt renting).
And, in the latest act of DC competence, now that additional housing supply is most needed, rates have had to have been finally freed because of all the latent, pent up inflation.
But those more honest rates make new home supply more expensive to build.
And homebuilders have spent the 20 years of ZIRP learning absolutely nothing about more efficient, cost-effective construction. Why bother, when Fed policy was making them McMansion rich for building the same houses since 2001, for 3x the sales price?
Rent for 3 bedroom townhomes in Panama City Beach, FL seem to barely go up, if not remain steady for the last 3 years.
Again, no one looks down Main Street. No one is giving up a 4% mortgage.
Frankly, not many earn the new middle class income requirement either.
Here we have a full blown inflationary depression. Only a crash can end it. Instead, the fed inflates faster than ever. There is no change in sight. However, FJB and all his supporters.
Sometimes rents are stubbornly high because some people want them to be stubbornly high.
https://finance.yahoo.com/news/tricked-tenants-arizonas-ag-suing-130100329.html
Just amazing how much housing can be taken off the market when for 14 years (2006-2020) free money (zero percent money) was made available to hedge funds, private equity and all forms of rich and connected people who used it (and will continue to use it in 2025) to buy up everything in America (taking America private) that isnt nailed down, including all those houses and rentals that somehow, someway, somewhere disappeared from the for sale listings, raising the price of everything else. Why cant anyone see that?
Real equity … Its not just for poor people!
“One of the surprises of the last six months, specific to multifamily, has been the reacceleration of demand,” Parsons said.
Shouldn’t be a surprise if millions continue coming through the border. They have to live somewhere.