Here’s why it may take a while for housing inflation to cool off

Here’s why it may take a while for housing inflation to cool off

Here’s why it may take a while for housing inflation to cool off

An ‘open house’ flag is displayed outside a single family home on September 22, 2022 in Los Angeles, California.

Allison Dinner | Getty Images

There are signs inflation may fall further in coming months, but housing threatens to mute any improvement.

The consumer price index, a key barometer of inflation, rose 7.7% in October from a year ago. While still quite high by historical standards, that annual reading was the smallest since January.

The monthly increase was also smaller than expected — giving hope that stubbornly high inflation, and the negative impact it’s had on consumers’ wallets, may be easing.     

Yet the cost of shelter jumped by 0.8% in October — the largest monthly gain in 32 years. That may seem counterintuitive at a time when many observers have said the U.S. is in a “housing recession.”

But shelter inflation — as reflected in the CPI, at least — is likely to stay elevated for several months to a year given its importance in household budgets and the intrinsic dynamics of rental and housing markets, economists said.

“As the housing market cools, this category will also ease but we may have to wait until next year before it meaningfully dampens headline inflation,” said Jeffrey Roach, chief economist for LPL Financial.

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The rental and housing markets are cooling

Flagging demand has led home and rental prices to cool or moderate in many areas of the U.S.

New U.S. home listings in the month, through Nov. 6, were down 17.5% compared to the same period a year earlier, according to Redfin, a real estate brokerage. The typical sales price, $359,000, was down over 8% from its $392,000 peak in June, according to Redfin.

Mortgage demand has fallen as rates steadily climbed to a recent peak over 7%, though rates declined sharply last week.

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Meanwhile, rental inflation has slowed in 2022 from its breakneck pace last year, Zillow data suggests.

Americans paid an average $2,040 market rent as of Oct. 31, according to the Zillow Observed Rent Index, which is seasonally adjusted.

That rent price was up 0.31% from a month earlier, on Sept. 30. But the pace of that growth has slowed for four consecutive months. By comparison, rents had jumped by about 1% in the month from end-May to late June. Rental inflation touched 2% a month in July and August 2021, according to Zillow data.

Why shelter prices lag

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