A real challenge in housing inflation may be on the horizon, and the Fed has been on its guard.
The Fed** said they believe housing inflation will eventually cool down in the coming months, which is a key factor in controlling headline prices** and ensuring a shift to rate cuts. However, the real challenges in this area may be on the horizonBecause the ** of new apartments is starting to dry up and the inventory of single-family homes is still in short supply, this will lead to upward pressure on the ** of single-family homes in the future, and the cost of housing accounts for about one-third of the CPI index.
This is despite the fact that the Fed's 2% inflation target is benchmarked against the core PCE, which is less sensitive to housing costsThe Fed** still views housing and rent dynamics as an important, unresolved part of the inflation struggle, and also highlights the intrinsic motivation for them to maintain a tightening stance.
The Fed** acknowledges that it is difficult to find an interest rate setting that controls aggregate demand without stifling new homes and apartments**, but some argue that policymakers have relied too heavily on economic data.
Jay Lybik, national director of multifamily analytics at Costar, a real estate data firm, said: "You think you can build a home ...... with a snap of your fingersBut that's not the case. "Costar's data suggests that by early next year, the number of new apartments will drop significantly, possibly to 50,000 or 60,000 units per month, compared to an estimated 100,000 units needed to meet demand.
Libic said: ".We are at risk of significant rents, which will make things worse in 2025 and 2026.
While inflation has eased from a 40-year high, the Fed** acknowledged that recent progress has been "bumpy", especially housing inflation that has persisted longer than expected.
Last month's CPI surprise** was largely due to housing costs remaining at 6% year-on-year, compared to 4% when headline inflation was near or below the Fed's target before the pandemic.
Near-real-time rent indicators suggest that housing** growth has been slowing. For example, an index by Zillow, a real estate firm closely watched by the Federal Reserve, grew 3. year-over-year as of January4%。
Arben Skivjani, deputy chief economist at real estate management and analytics firm Realpage, said in a recent speech at the National Association for Business Economics about the decline in housing inflation, "We knew it was coming." After nearly 16% per year at the start of 2022, asking rental prices have barely increased since last summer, according to Realpage.
Still**Restrictions may pose a risk of a prolonged acceleration in inflation.
Mark Fleming, chief economist at First American Financial Corporation, said at a conference: "We haven't built enough homes, and we haven't had enough housing for at least a decade....In the long run, there are certainly underlying inflationary pressures. ”
The year-on-year increase in housing inflation reached 8The peak of 32% is the fastest since the early 80s of the 20th century. Census data shows that median home prices peaked at $479,000 at the end of 2022, up nearly 50% from $322,000 in the second quarter of 2020, the fastest increase since the early 1960s.
Since then, the median home price has fallen back to $417,000, which is the highest level in 25 years.
But some recent indices on home sales are showing **again**, which has forced the Fed** to focus on home sales and construction data for evidence that demand and** may be trending towards a better balance.
Cleveland FedA new study analysing the severe supply-demand imbalances that drove house prices** during the pandemic is an example of how policymakers are focusing on this area.
Chicago Fed President Goolsbeesaid that housing is a missing piece of the puzzle that the Fed hopes to bring inflation down generallyRichmond Fed President BarkinHe analyzed the building patterns in his area, comparing the neighborhoods that were able to keep up with the pace of new home construction with other neighborhoods. This was the main takeaway from his recent speech.
Gregory Daco, chief economist at EY, said the near-term downward path for housing inflation is clear and could make a significant contribution to reducing headline inflation in the coming months, a fact he sees as clear and "increasingly frustrated" with the Fed's reluctance to act. But he also admits that next year will be another story.
"Rental inflation has slowed down significantly," he said. This has not yet been fully reflected in the data that the Fed is most closely watching. But in another 6 to 12 months, things may actually go in the other direction......This is because of the insufficiency. ”