Surprising Growth in Shelter Costs

For over a year, economists and financial market experts have confidently argued that shelter costs are on the verge of decreasing. However, the recent data reveals an unexpected rise in shelter costs, catching many by surprise.

Stephen Stanley, chief economist of Santander Capital Markets, has voiced his belief that while shelter costs will indeed slow down, the decline will not be as significant as initially anticipated.

Following the release of the January consumer price index, Stanley highlighted the increasing costs of both new and used homes. Furthermore, due to a chronic shortage of available properties for sale, rental units are in higher demand. These factors suggest that rents may not decrease by as much as expected.

Stanley also mentioned that the Federal Reserve's decision to cut interest rates is unlikely to be solely influenced by the state of the real-estate market. He stated that the Fed is more concerned about inflation in the services sector, which poses greater challenges due to the labor-intensive nature of service firms.

In January, both housing and services inflation worsened, resulting in a sharp increase in the consumer price index. Shelter costs, including rent, homes, and hotels, rose by a significant 0.6% last month. The annual increase in shelter costs decreased only slightly from 6.2% to 6%.

Thomas Simons, U.S. economist at Jefferies, noted that shelter costs continue to remain persistently high despite expectations for a decrease. Additionally, services excluding shelter and energy experienced a steeper increase of 0.9% in January. The yearly increase in the Fed's preferred measure of labor costs, known as the "supercore rate," also rose from 3.9% to 4.4%.

Economists emphasize that the Fed's primary concern lies with the cost of services, as labor costs and service prices tend to be more resistant to decline. Officials have recently stressed the importance of a continued downward trend in the supercore services index, according to Nationwide's chief economist Kathy Bostjancic.

Despite government data indicating an increase in housing costs, the real estate industry remains puzzled by these findings.

The Mystery of Apartment Rents and Home Prices

Introduction

"It is a bit of a mystery since apartment rents are no longer rising and single-family rent growth is at low single-digits," said Lawrence Yun, chief economist at the National Association of Realtors.

Declines in Apartment Rents

Private-market measures of rent point to smaller price increases or even outright declines. The construction of numerous apartments in recent years, driven by increasing demand, has contributed to pushing rents down. In fact, the average median rent nationwide fell by 0.3% in January to $1,373, according to an estimate by Apartment List. Year-over-year rent has also declined by 1%.

Relief for Renters, but Not Buyers

Asking prices for market-rate rents have fallen for the past eight months, which is alleviating some pressure on overall inflation, according to Realtor.com's chief economist Danielle Hale. However, there seems to be no relief for Americans looking to buy instead of rent.

Rising Home Prices

Home prices are once again on the rise due to a shortage of new and used homes for sale. The median resale home price has increased by nearly 40% over the past four years, creating a challenging market for potential buyers.

Limited Options for Buyers

The limited supply of homes for sale has caused homeowners to hold onto their properties, unwilling to give up their low mortgage rates that can be as low as 2%. This lack of available options has contributed to a significant decrease in home sales, reaching a 29-year low in 2023.

Little Relief for Homebuyers

With mortgage rates still hovering around the high 6% range, homebuyers should not expect much relief when it comes to purchasing a new home.

Conclusion

The real estate market currently poses a mystery as apartment rents decline while home prices continue to rise. Renters benefit from decreasing rents, but potential buyers face challenges due to limited supply and rising prices.