US Housing Cost Increase Rate 6%... Rent as a Variable for Fed Interest Rate Cut

There is an analysis suggesting that the timing of the U.S. Federal Reserve's (Fed) interest rate cuts depends on the rate of increase in housing rents. Concerns have been raised that inflation could become entrenched around 3% as the rate of increase in housing costs is not slowing down as quickly as expected.

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On the 12th (local time), The Wall Street Journal (WSJ) reported that the rise in housing costs, which accounts for one-third of the Consumer Price Index (CPI) and one-sixth of the Personal Consumption Expenditures (PCE) price index, has recently continued to fuel inflation.

The U.S. government calculates inflation rates based on rents rather than housing prices. The problem is that rent increases remain at a high level. Private sector experts had expected a slowdown in rent increases since late 2022, but rents have continued to rise sharply, preventing inflation from quickly slowing to the Fed's target of 2%.

Looking at the core PCE price index, the inflation indicator most closely watched by the Fed, rent increases stand out. The core PCE price index is largely composed of goods prices, housing costs, and non-housing services prices. In March, the core PCE price index rose 2.8% year-over-year, with housing costs increasing 5.79% compared to a year earlier. Non-housing services prices rose 3.49%, while goods prices fell 0.56%. Housing costs showed the largest increase.

Before the COVID-19 pandemic, the core PCE price index averaged less than 2% over the previous decade. During that period, sector-specific inflation rates showed goods prices at -1%, housing costs between 2.5% and 3.5%, and non-housing services prices in the 2% range. Ultimately, for inflation to return to the Fed's 2% target, housing cost increases must fall from the current 5.79% to 3.5%, and non-housing services price increases must drop below 3%.

Earlier, Fed officials identified the rate of increase in housing costs as a factor slowing inflation. Last month, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, pointed to the housing services sector as the biggest obstacle to recent inflation declines. He expected new rents to slow rapidly, but the current situation does not reflect that, stating that a decline in new rents is necessary for inflation to fall to 2%.

The problem is that due to rising borrowing costs caused by prolonged high interest rates, more tenants are extending their lease agreements instead of purchasing homes. This increase in rental demand may mean it will take considerable time before the rate of rent increases slows down.

According to Camden Property Trust, a Houston-based real estate company owning 58,000 apartments, the proportion of tenants purchasing homes and moving out this year is 9%, the lowest level in 30 years. Typically, the proportion of tenants moving out after buying homes was around 15-18%, according to the company.

Rick Campo, CEO of Camden Property Trust, said, "Most expected rent growth in the Sun Belt (southern U.S. region) to have dropped significantly, but demand is much higher than anticipated."

WSJ forecasted, "Experts have been waiting for more than a year and a half for a slowdown in housing cost increases, but this has not yet occurred and may be further delayed. Given the current housing market conditions, housing cost increases may not slow down, which would significantly weaken arguments for interest rate cuts."

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