A Wall Street Journal article reminds us increasing rents have a significant impact on overall inflation… and inflation tends to drive mortgage interest rates. The Mortgage Blog addressed this back in May 2023, and it’s time to revisit the topic.
A key concept from the 2023 post is this: 44.4% of the consumer price index (CPI), a key measure of inflation, is “shelter inflation.” Shelter inflation measures the change of rental costs – not home prices paid by home buyers. The rapid increase of residential rents beginning in early 2021 has been a major factor driving high inflation. Logically then, if rents decrease, the overall inflation rate / CPI index should decrease too.
Our original post went on to note economists were hoping increased apartment construction would cause lower rent inflation. But one year later, we get this headline, “Rents are Still Rising and Pumping up Inflation.” So what is happening now?
First the good news, rent growth slowed from double-digit highs during the pandemic to 5.7% in March 2024. While an improvement, it is still well above the average shelter inflation rate of 3.3% during the 2015 to 2019 period. Economists are still predicting shelter inflation will continue to decline as more rental units are built.
According to an economist quoted in the article, shelter inflation is usually higher than the overall inflation rate. This economist believes shelter inflation is still higher than normal and needs to fall further to lower inflation and hopefully lead to interest rate cuts.
Increases for “asking rents,” or rents on new leases for available units, have now dropped to a level close to zero. These asking rents are considered a leading indicator for the overall rental market. Analysts think the volume of newly built apartments will drive down what landlords can charge for asking rents.
On the other hand, “renewal rents,” or rents for tenants who want to renew their leases, were 7% higher year-over-year in January, in a study of several large US cities. The article quotes renters whose landlords requested annual rent increases between 15% and 30%. The research firm Attom reported median rent for a three-bedroom home is increasing faster than wages in more than 50% of the counties they studied.
A large percentage of leases have renewal periods in the spring and summer seasons. This renewal timing could coincide with new apartment supply reaching a peak. If this does happen, the additional supply could limit landlords’ ability to raise rents, which could then have a cascading effect of lowering shelter inflation, leading to lower overall inflation. The goal here is mortgage rates could improve with continued cooling inflation coupled with the Fed lowering the Federal Funds Rate.
In the meantime, expect mortgage rates to remain in the range they currently sit.
Thinking about buying a home in Georgia? Give me a call to discuss your options soon. While it may seem smart to wait for possible lower shelter inflation to push interest rates down, lower rates could cause a serious increase in competition and drive home prices even higher. I recommend buyers proceed now while the competition is not as fierce and they can negotiate better deals. If rates do drop significantly, refinancing an existing mortgage is usually a great option.