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The Real ‘Doom Loop’ Is the Effect of Housing Prices on Inflation
Defining the future of real estate
Franco Faraudo
April 11, 2024
Propmodo Daily
By Franco Faraudo · Apr. 10, 2024
Greetings!
The Federal Reserve's latest inflation numbers are disappointing. Inflation rose in March compared to February, raising concerns in capital markets that an interest rate cut may be further off than hoped. In today's email, we'll explore how housing costs are driving up the consumer price index and discuss potential solutions.
Plus, this week in Propmodo Technology, sponsored by SWTCH, we're exploring multifamily management. Discover how technology optimizes feasibility studies, the rising value of electric vehicle charging stations, and strategies to accelerate lease-ups.
Now, let's dig in!
The Real ‘Doom Loop’ Is the Effect of Housing Prices on Inflation
The new inflation numbers out, and they don’t look good. Rather than a lower Consumer Price Index number that most had hoped for, inflation rose in March by .4 percent. This news crushed the dreams of many that the Fed would start lowering interest rates later this year and sent real estate stock prices tumbling.
The main contributing factor to the latest inflation numbers is shelter. The cost of housing has continued to increase, despite high interest rates. It would seem that higher interest rates would put pressure on the price of housing since homes are much more expensive to finance when mortgage rates go up. But that hasn’t been the case. Since rates were low for so long most homeowners refinanced their mortgages to lower rates. This has prevented many of them from moving and has led to some of the lowest levels of mortgage originations in decades.
So, high mortgage rates didn’t bring down the price of homes as expected, but they did do something really important: they pushed the price of rent up. New homeowners are finding themselves forced to rent thanks to higher monthly mortgage costs, which has increased the supply of renters. At the same time, rents are able to go up because, comparatively, they are still cheaper than buying a home with 7 percent mortgage coverage.
What makes all of this so impactful on CPI is the way that it is calculated. The shelter component of CPI has nothing to do with what people are paying monthly for their mortgage since it could vary depending on the rates and how much they owe. Instead, the Fed uses the amount a homeowner would have spent to consume the same amount of housing services provided by their owner-occupied home.
That means that rising rents are more of a factor in CPI than mortgages. As the Fed raises rates to bring down the price of goods, it is also rising the price of shelter, which represents about 30 percent of CPI and almost 40 percent of Core CPI that excludes volatile goods like food and energy.
The only way that the Federal government will be able to get inflation down to the 2 percent that they are targeting is to slow down the price growth of shelter. This can’t be done by rising interest rates alone. We will need to see more housing development across the country to bring down the cost of shelter but doing so will be harder than ever since developers are one of the susceptible groups to interest rates.
As the next election approaches inflation is sure to be one of the main talking points. Whoever wins will have to prove that they will not only battle inflation with interest rate adjustments but that their administration will do whatever it can to spur housing development and bring down the stubborn price of shelter once and for all.
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🏦 Bank it: New York City has hit its highest office occupancy since the pandemic, thanks mostly to financial services companies, many of which have ordered workers back full-time.
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Overheard
The Real Estate Nightmare Unfolding in Downtown St. Louis
The office district is empty, with boarded up towers, copper thieves and failing retail—even the Panera outlet shut down. The city is desperately trying to reverse the ‘doom loop.’ #office#CMBS#CMBX#CRE@WSJ— BB (@doggedtenacity)
12:09 PM • Apr 10, 2024
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