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At about a third of CPI, rent is helping drive inflation

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Illinois

Rents rose in the US last month at the fastest pace since 1986, helping to propel overall inflation to a fresh four-decade high.

n index measuring rent of a primary residence was 0.8% higher in June than the month before, an acceleration from the 0.6% increase recorded in May, according to the Labor Department’s report on consumer prices published Wednesday. In the 12 months through June, rents were up 5.8%.

Those costs are soaring across the country as would-be homebuyers get priced out by the fastest-rising mortgage rates in decades and slide back into the overcrowded rental market. But rent growth may be peaking as affordability concerns mount, and a surge in construction of new units is poised to start adding to the available inventory.

The Labor Department measure tends to lag behind other estimates, so it is likely that rent increases will contribute to rising inflation in the consumer price index through the rest of this year, according to Mark Zandi, chief economist of Moody’s Analytics. […]

Nearly 836,000 multifamily units are under construction, the most since 1973, according to Jay Parsons, chief economist at RealPage. But most new construction targets higher-income tenants and not the lower end, where supply shortages are most extreme, he said.

Rent is up 4.3 percent over the past year in the Chicago-Naperville-Elgin area.

* But…

Since 75% to 80% of renters remain in their homes every year, the topline figure is weighted toward the inflation rate experienced by continuing renters.

The rate is much higher for new renters.

* Also…

Rent comprises 40% of the core CPI price index.[1] Tenant rent and housing characteristics are used to impute an “equivalent” rent for owner-occupied homes in the index. During the pandemic, this method may have led to distorted estimates for owner-occupied rent because most tenants live in multi-unit properties whereas 9-in-10 owner-occupants live in one-unit homes.

* And…

Housing represents about a third of the value of the market basket of goods and services that the Bureau of Labor Statistics (BLS) uses to track inflation in the Consumer Price Index.

* Crain’s last month…

The net rent at high-end, or Class A, apartment buildings hit an all-time high of $3.55 per square foot in the first quarter, up 19.1% from a year earlier, according to the Chicago office of Integra Realty Resources, a consulting and appraisal firm. After plunging with the arrival of the COVID-19 pandemic, the downtown multifamily market is soaring once again, pushing up the cost of housing and pumping up the profits of landlords. […]

It’s not just the high end of the downtown market that’s booming: Net rents at less-expensive Class B buildings also rose to a record high, $2.92 per square foot, in the quarter, up 18.7% from a year earlier, according to Integra. Net rents include concessions like free rent. […]

Right now, demand for apartments exceeds supply, but the market should move closer into balance next year, when developers complete nearly 3,900 apartments downtown, according to Integra. If tenants don’t get any relief from rising rents then, they might in 2024, when Integra forecasts developers will add another 4,800 units to the downtown market.

Not too awful worried about people who can afford that much rent.

* NY Times…

Rents have been rising swiftly across America for much of the pandemic era, and housing experts are warning that they could now receive a boost from an unlikely source: the Federal Reserve.

As the central bank raises interest rates to cool down the economy and contain rapid inflation, it is also pushing up mortgage costs, putting home purchases out of reach for many first-time buyers. If people who would have otherwise bought a home remain waylaid in apartments and rented houses, it could compound already-booming demand — keeping pressure on rental prices.

While it is tough to predict how big or how lasting that Fed-induced bump in rental demand might prove, it could ironically make it more difficult for the central bank to wrestle inflation lower in the near term. Rent-related costs make up nearly a third of the closely tracked Consumer Price Index inflation measure, so anything that helps to keep them climbing at an unusually brisk pace is likely to perpetuate rapid inflation. […]

Because a large number of new apartments and condominiums have been started since the pandemic began, few if any economists expect the recent breakneck pace of rent increases to continue: More supply should be on its way. Some markets, like Phoenix, have already seen a slowdown in real-time rent trackers.

But new buildings are taking a long time to finish amid shortages of both the labor and supplies needed to turn blueprints into reality, and it is uncertain when those challenges will clear up. Plus, new apartment and housing developments skew toward high-end and luxury units at a moment when the nation is short about 1.5 million housing units that are affordable and available to lower-income renters, according to a Harvard housing study.

So, price hikes may ease for upper-income types, but not for others. And rising interest rates will make it even less likely that people will build smaller, affordable rental properties. Maybe some smart policy people ought to take a look at this.

* Related…

* The Great Rent Squeeze: Landlords’ jacking up rent was the single largest factor in May’s red-hot inflation report

posted by Rich Miller
Thursday, Jul 14, 22 @ 9:49 am

Comments

For the better part of two years, many landlords were prevented from evicting tenants. You can point to relief money, but that didn’t cover everyone who was owed money, or all that they were owed. A natural consequence of that, and of the idea of rent control in general, is going to be increased rent going forward to recoup costs, with either new tenants or smaller property owners getting out of the game and selling to larger property management companies. What is initially thought of as feel-good policy (rent freezes, moratoriums, etc,), is eventually going to have not so great impacts.

Comment by fs Thursday, Jul 14, 22 @ 10:03 am
Rising rates are helping drive this problem. There is an undersupply of housing units leading to increased competition. Higher rates mean fewer units being built. And those higher rates may force a recession, which will lead to even fewer units being built. Housing is a mess everywhere and there are so few solutions that are viable. Happy Thursday.

Comment by Ducky LaMoore Thursday, Jul 14, 22 @ 10:11 am
Well - property owners were forced to provide free housing for a couple years, and still haven’t recovered from that kick in the stomach. Their expenses never went away (ie property taxes) so they money has to come from somewhere. Hence- higher rents for everyone.

Comment by Just Me 2 Thursday, Jul 14, 22 @ 10:13 am
The emerging policy that I’m noticing is state law to legalize the middle market of rental properties — the old school three or four story buildings with retail and housing on top that are the charming part of most older cities but often not allowed anymore. It’s illegal to build that kind of walkable affordable housing (which apparently pencils out for the developer).

I don’t know if that’s true for all or any of Illinois, but I’ve seen a lot of smart policy people argue one of the best policies is to lift restrictions on building multi-story housing.

This Missoula MT council member seems to know what’s he’s talking about to rezone the ‘missing middle’

https://twitter.com/CarlinoforMT/status/1544333677940948993

Comment by Dan Johnson Thursday, Jul 14, 22 @ 10:13 am
Also, according to a recent ProPublica piece, many investment firms, like Blackrock and others, have purchased a large proportion of the nations housing stock (since the 2008 financial crisis and subsequent Covid crisis) and transformed many single-family homes into rental properties. These large investment firms then have the latitude to raise rents year over year, thus contributing to inflation.

Comment by Double A Ron Thursday, Jul 14, 22 @ 10:16 am
Agree with the “middle market” sentiment. The crux of the whole issue is: how to make affordable housing more affordable? Surely zoning or regulations have something to do with it, it’s hard to pick which consumer protections are no longer worth the cost. Municipalities, like Missuola must play a huge rule, but then comes the NIMBY sentiment.

Comment by LC Illini Thursday, Jul 14, 22 @ 10:26 am
== You can point to relief money, ==

Still waiting 2+ years to see that COVID relief rental money …

Comment by RNUG Thursday, Jul 14, 22 @ 11:09 am
==and of the idea of rent control in general, is going to be increased rent going forward to recoup costs==
While some areas in the US have rent control, Illinois and a large number of other state pre-empted local rent control in the 1990s after a push by the realtors. Considering the survey data that smaller mom & pop landlords and BIPOC landlords were more likely to assist tenants during COVID, I’d be very interested in seeing if this is just big money squeezing people on a relatively inelastic good.

Comment by Nuke The Whales Thursday, Jul 14, 22 @ 11:13 am
CPI is an average across a basket of goods that spans all sectors. So, if rent is going up at a rate below CPI, then the right way to think about it is that slow rent increases are reducing overall inflation. The right place to look for culprits are the sectors that are increasing at a faster than average rate.

Comment by 61820 Thursday, Jul 14, 22 @ 11:19 am
I’ll admit up front that I am not an economist and some of this is over my head. I also have nothing but sympathy for renters, know that, unlike gas prices, once rents go up, they won’t go down. But maybe someone can explain to me how this affects someone like me, who is paying a mortgage on my home which is a fixed amount. Does this mean, since I am not a renter, my actual inflation rate is lower? Or am I covered under this “Tenant rent and housing characteristics are used to impute an “equivalent” rent for owner-occupied homes in the index.”? TIA.

Comment by G'Kar Thursday, Jul 14, 22 @ 11:23 am
== While some areas in the US have rent control, Illinois and a large number of other state pre-empted local rent control in the 1990s ==

By statute, yes, but it can be argued that the eviction moratorium was effectively a form of rent control for two years.

Comment by fs Thursday, Jul 14, 22 @ 11:37 am
One of the tough aspects of inflation the last two years is how it has been high and steady, but had a lot of underlying shifts between items that are outsize contributors at any one time.

https://twitter.com/jasonfurman/status/1547223428989497344

https://twitter.com/jasonfurman/status/1547245914326069249

Comment by Google Is Your Friend Thursday, Jul 14, 22 @ 12:10 pm
Municipalities often have the ability to require more units in new multi-family buildings to be priced at an affordable level. However, the developers are often able to pay a “fee in lieu” to reduce the overall number of affordable units they have by paying a municipality one lump sum per unit that would otherwise be affordable. Developers take that deal every time because they know they’ll make their money back on the more expensive units. Meanwhile, those funds go sit in the muni’s bank account and it takes years for them to accrue to a level where they can actually do something with them.

Part of the battle in creating more affordable housing in this state is actually using the tools we have available.

Comment by Panther Pride Thursday, Jul 14, 22 @ 1:16 pm
“Well - property owners were forced to provide free housing
for a couple years, and still haven’t recovered from that kick in the
stomach.”

Not true. No property owner was forced to provide free housing. A lease is a contract and any tenant that signs a lease has to honor that contract. Tenants can be sued for the rent that is due and their wages can be garnished. In Illinois a written contract has a statute of limitations for ten years.

Comment by Heres another Thursday, Jul 14, 22 @ 2:50 pm