Category: Blog

The weekly 30-year fixed rate mortgage (FRM) on March 21, 2024, was 6.87%. This is an increase of 403 bps since the end of Aug-21 when it was 2.84% but just 61 bps higher than this time last year (6.26%). Concurrently, the year-over-year home price gains through Feb-24 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have slowed down but remain positive at 4.27%. Table 1 shows the deceleration and now acceleration of the purchase market.

Do changes in home prices filter into the rental market. First it must be pointed out that month-over-month rent growth (Rent3bd column 5 and RentApts, column 7 have been seasonally adjusted). We see evidence of rent appreciation (RRA) for both types of units staying above 4.0%.

There is evidence that growth in rents on SFR detached properties and apartments in multi-unit building are leading indicators of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties is now 4.97%. We also see in column 9 that YOY growth in rental rates on apartments in multi-unit structures is still positive and now growing at a very​​ fast rate (5.04% vs 5.16% last month). This information suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.

To get a micro-sense of how rents are changing with prices, Chart 1 shows both the year-over-year increases in home prices (HPA) and in rental rates (RRA) as of Feb-24 for our 20 CBSAs.

The chart shows that RRA loosely rises with HPA as we move to the right. The red bars show the significant rises in rental rates for 3-bedroom property and the equally fast rise for rents of apartments in multi-unit buildings.

In the face of higher mortgage rates, there are some reasons for the still amazingly steady home price growth we see in Table 1.

• Migration out of high-priced California

• Migration out of Central and South America to Miami

• The job market remains very strong​​ 

• Millennials moving into their childbearing age and trying to get out of their parent’s houses.

Because vacancy rates are low, the changes in rents for 3 bedroom detached properties and apartments that we see in Table 1 and Chart 1 are probably not due to seasonality. Rents are likely to stay high because:

• Vacancy rates are low, despite the increased purchases of homes.

• Landlords have pricing power.

• Apartment renters might have low earningss and weak credit and may have no other choices but to pay higher rents​​ 

Individual CBSA rental markets:

Although slowing, these still high rental prices may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of earnings to shelter. To partially answer this question, we show four additional charts below. The first (Chart 2) is for three-bedroom detached properties and the second (Chart 3) is data for apartment rental (all unit sizes) in multi-unit buildings.​​ 

Chart 2 shows that in major CBSAs, like Los Angeles, CA, New York, NY , Miami, FL and San Francisco, CA renters are willing to allocate more than 50 percent of their earnings to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from Aug-21 to Feb-24 (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time before the Federal Reserve began increasing mortgage rates.​​ 

Renters are now paying more than 5 percent more of their earnings to pay their rent in at least four cities than they were on Aug-21. On the left-hand-side of the chart renters are paying less out of their earnings. In Phoenix, AZ builders have increased both the supply of houses for sale and supply of​​ apartments for rent and this has put downward pressure on rent of single family properties.​​ 

The increased economic hardships now facing renters show up even more so in Chart 5. In that chart, we see that renters of apartments in​​ 5​​ of the 20 cities that we track are now paying 7% more of their earning towards rent than they had been paying before the rates rose in Aug-21.

The weekly 30-year fixed rate mortgage (FRM) on​​ Feb​​ 1,​​ 2024, was 6.63%. This is an increase of 356​​ bps since the end of Nov-21 when it was 3.07%​​ but just 36 bps higher than this time last year (6.27%). Concurrently, the year-over-year home price gains through​​ Dec-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have slowed down​​ but remain positive at​​ 2.94%.​​ Table 1 shows the deceleration of housing.

Do declines in home prices​​ filter into the rental market. First it must be pointed out that month-over-month rent growth (Rent3bd column 5 and​​ RentApts, column​​ 7 have been seasonally adjusted).​​ We see evidence of rent appreciation (RRA) mimicking (HPA) during the summer months.​​ There is​​ also​​ evidence that growth in rents on SFR detached properties appears to be a leading indicator of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties is 4.72% which​​ suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.​​ 

We also see in column 9 that YOY growth in rental rates on apartments in multi-unit structures is still positive​​ and​​ now growing at a​​ faster​​ rate (4.10% vs​​ 3.51%​​ last month). To get a micro-sense of how rents are changing with prices, Chart 1 shows both the month-over-month increases in home prices (HPA) and in rental rates (RRA) as of Jan-23 for our 20 CBSAs.

The chart shows that RRA loosely​​ rises​​ with HPA as we move to the​​ right. The red bars show the significant​​ rises​​ in rental rates for 3-bedroom property and the much slower​​ rises​​ for rents​​ of​​ apartments in multi-unit buildings.

In the face of higher mortgage rates, there are some reasons for the still amazingly steady​​ home price growth we see in Table 1.

• Migration out of high-priced California

• Migration out of Central and South America to Miami

• The job market remains very strong​​ 

• Millennials moving into their childbearing age and trying to get out of their parent’s houses.

Because vacancy rates are low, the​​ changes​​ in rents for 3 bedroom detached properties and apartments that we see in Table 1 and Chart 1 are probably​​ not​​ due to seasonality. Rents are likely to stay high because:

• Vacancy rates are low, despite the increased purchases of homes.

• Landlords have pricing power.

• Apartment renters might have low incomes and weak credit and may have no other choices but to pay higher rents​​ 

Individual CBSA rental markets:

Although​​ slowing, these still high rental prices may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of income to shelter. To partially answer this question, we show four additional charts below. The first (Chart 2) is for three-bedroom detached properties and the second (Chart 3) is data for apartment rental (all unit sizes) in multi-unit buildings.​​ 

Chart 2 shows that in major CBSAs, like Los Angeles, CA, New York, NY , Miami, FL and San Francisco, CA renters are willing to allocate more than 60 percent of their income to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from​​ Aug-21​​ to​​ Dec-23 (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time before the​​ Federal Reserve began increasing mortgage rates.​​ 

Renters are now paying more than​​ 4​​ percent more of their income to pay their rent in at least four cities than they were​​ on​​ Aug-21. On the left-hand-side of the chart renters are paying less out of their income.​​ 

The increased economic hardships now facing renters show up even more so in Chart 5. In that chart, we see that renters of apartments in​​ 6​​ of the 20 cities that we track are now paying significantly higher rents relative to their income than they had been paying before the rates​​ rose in Aug-21.

The 30-year fixed rate mortgage (FRM) ended on January 4, 2024, at 6.62%.​​ This is an increase of 387 bps since the end of Aug-21 when it was 2.84%,​​ but only 64 bps higher than a year ago. Concurrently, the year-over-year home price gain through Nov-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) was a positive 3.74% - slow but still positive (Column 4 in Table 1).​​ 

How long does it take for home price declines to filter into the rental market? This is an important question because rents filter into the CPI calculations and there is evidence that growth in rents on SFR detached properties appears to be a leading indicator of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties in Nov-23 was reported at 5.22% by Altisource.com and for detached properties of all bedroom sizes at 5.25% by Zillow.com. Given the long lag time for the rate changes to filter into the CPI data, this suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.​​ 

To get a micro-sense of how rents are changing with prices, Chart 1 shows the year-over-year increases in both home prices (HPA) and in rental rates (RRA) as of Nov-23 for our 20 CBSAs.

The chart shows that across CBSAs, RRA does seem to move in-step with HPA. The clear bars with a horizontal line (RRAz) are small positive values. As we move from left to right, the dotted bars show initially negative changes and then they turn into positive increase in HPA across CBSAs. The red bars show the significant​​ year-over-year​​ increases​​ in rental rates for​​ a​​ 3-bedroom property. Higher mortgage rates have deflated the home price bubble, but not the rent bubble. It is important to note:

• It can take 12 months for HPA to filter into RRA3bd and RRAz, depending on the city.

• Vacancy rates are low, despite the increased purchases of homes. Landlords have pricing power.

• Apartment renters might have low incomes and weak credit and may have no other choices but to pay higher rents.​​ 

Individual CBSA rental markets and earnings:

The still high appreciation of rental rate may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of its income to shelter.​​ 

​​ 

Chart 2 is based upon data for detached properties (but only with three bedrooms) from Altisource.com. Chart 3 is based upon data on detached properties (all bedroom counts) from Zillow.com. ​​ Both charts show that in major CBSAs, like Los Angeles, CA, New York, NY, Miami, FL and San Francisco, CA renters are willing to allocate more than 55 percent of their earnings to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from Aug-21 to Nov-23 (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time since the Federal Reserve began raising rates. ​​ 

Matching Market Rental Data to​​ 

Apr-23 CPI Shelter Data

The BLS reported that CPI shelter increased year-over-year by 8.1% (Col 2 Table 1). The CPI rent indices (OER and Shelter) are lagging indicators of the market by about 12 months. Columns 3 and 4 show year-over-year rent appreciation for three-bedroom single family properties and apartments (all bedroom sizes) in multi-unit buildings.​​ 

Recognizing the long lag structure of Shelter based upon market data, CPI Shelter will slow but remain a major contributor to core CPI. This might require additional interest rate hikes by the Federal Reserve.​​ 

Over the 12 months ending Mar-23, the Consumer Price Index (CPI) increased 5.0%; this was the smallest 12-month increase since the year ending May-21. Energy prices decreased 6.4% since Mar-22. Commodities rose by only 1.53%. The BLS also released its​​ core PCI inflation​​ number for Mar-23. Core CPI rose 5.6% from a year ago and is still above the Federal Reserve’s 2% target (see Table 1).​​

Other sections of the economy​, however, are​​ not slowing as fast as commodities. The U.S. rental market is still running too hot.​​​​ The BLS is​​ trying to measure monthly aggregate personal expenditures​​ on housing.​​ The BLS measures housing costs using its “cost of shelter”.​​ 

The CPI cost of shelter is essentially the sum of two components: The first, is a measure of the rents paid by apartment tenants in multi-unit structures for their primary residences. This measure is called CPI rent (or tenants’ rent). The second is an estimate of the rent that owner-occupied housing could command called Owners’ Equivalent Rent (OER). These measures tend to move together as the OER of a specific owner-occupied unit is estimated in part by observed actual rents on similar types of properties. Owner equivalent​​ rent, tenant’s rent and combined shelter represent 29.9​​ percent, 9.6 percent and a total 42​​ percent​​ of core CPI, respectively.​​ In Table 1, shelter increases by 8.18% in Feb-23.

Going forward, this high growth rate (above the 2% desired by the Federal Reserve) is likely to continue. Charts 1 through 3 show the problem.

The dotted line in Chart 1 shows​​ data for OER. The far-right observation is close to the 8.18% for shelter for Feb-23​​ that we see in Table 1. The solid line is the year-over-year percentage change in rents on three-bedroom properties (RRA3bd) for the 20 CBSAs tracked by the CHTR lagged 18 months.​​ The​​ data -- the average of rents on​​ 3-bedroom​​ properties -- is​​ a closer apples-to-apples​​ match​​ to​​ OER​​ than​​ rent data on​​ apartment units.​​ Yet, we still notice a lag.

The survey process used by the BLS results in OER being reported with a lag vis-à-vis Altisource.com which collects the​​ average​​ of rents in each city each month. This is true because the BLS takes a massive, nationwide,​​ rolling sample of housing units, splits them into panels, and then surveys each panel once every six months. The data then must be cleaned, checked and matched to the same property twelve months earlier.​​ They then take an average rent and a one month year-over-year change of that average.​​ The surveying process essentially delays reporting changes in market conditions. If we assume a roughly twelve-month lead between RRA3bd_YOY and OER we would see the problem facing the Federal Reserve. This is shown in Chart 2.

The solid line is actual data already reported by Altisource.com by taking an average of rents paid on three-bedroom properties. The chart pushes those observations of RRA3bd_YOY forward 12 months (P12RRA3bd_YOY). The mean rent of three-bedroom properties from 2023-01 will likely show up in the OER in 2024-01 as 4.75%. This is higher than the Federal Reserve’s target.

Chart 3 shows the relationship between rent appreciation for apartments in multi-unit structures tracked by Zillow.com and the BLS’s tenants’ rent in CPI.

The lag between the two is much shorter (about 4 months), but the variation is much larger than the lag between OER and RRA3bd. This occurs because of the way that Zillow.com constructs its rent index. Zillow constructs repeat-rent indexes by tracking the prices for rentals on their platforms, treating a unit as rented for the last-listed price as it leaves the platform, and then comparing against previous rental prices for the same unit. It is thus capturing what is called the spot rent (this is the amount renters would pay to sign a new lease today i.e., just rents on newly signed leases).

Again, the government data also takes into account existing rentals, while Zillow.com only examine prices for new leases to capture current market conditions. Since rents typically change when leases expire, which tends to happen annually, this can lead to a lag in government data. The point of Chart 3 (and Chart 2) is that CPI Shelter is going to remain high in the second half of 2023.

​​ 

How Much Will Rent Inflation Subside​​ in 2023?

On Friday (1/27/23), the BLS released the​​ core PCE inflation​​ number for Dec-22. It​​ rose 4.4% from a year ago, its smallest annual increase since October 2021.​​ This is still above its 2% target.​​ Disposable personal income came in at 3.18 percent. Also, consumer spending dropped 0.2% pointing to an economy that was grinding to a halt as 2022 closed.​​ 

Another section of the economy​​ that​​ is slowing, but not as fast as Core PCE is the rental market.​​ Owner equivalent​​ rent and combined shelter represent 24 and 33​​ percents​​ of CPI​​ respectively​​ (see synopsis of BEA methodology​​ and PCE shares​​ below).​​ A major question confronting macroeconomists going into 2023 is the pattern that rent inflation will take in 2023 and 2024 and its​​ impact on overall CPI.​​ Table 1.​​ shows that​​ the​​ shelter component​​ of​​ CPI grew at a month-over-month rate of 0.798​​ in Dec-22.​​ This works out to a 10 percent annual rate and a year-over-year growth rate of 7.5 percent.

The​​ Bureau of Labor Statistic’s​​ CPI program collects rent data from each sampled unit every 6 months. Many rents change infrequently, being locked in place for a given lease term, and collecting rent data less frequently allows for a larger sample.​​ This sampling process, to increase sample size,​​ results​​ in a lag between rent changes and​​ when​​ these changes showing up in the CPI​​ reporting​​ process.​​ Because the sampling process operates with a lag, in this month’s report, we look at what rental data collected by Altisource.com and Zillow.com might tell us about the patterns of rent in 2023. ​​ 

Chart 1 plot YOY %Δ​​ in​​ owners’ equivalent rent (OER) and YOY %Δ​​ in​​ combined shelter (Shelter_in_CPI). In addition, we include the YOY %Δ in rents for single family detached 3 bedroom properties and (RRA3bd) and YOY %Δ in rents for apartments in multi-unit building (RRAapt).​​ Because of the lag in how the BLS reports data, we push forward the our rent growth measures by 16 months.

This 16 month forward positioning of RRA3bd lines up pretty closely to both OER and Shelter. What we see from this analysis is that both RRA3bd and RRAapt flatten out and then decline below the 7.5 percent YOY %Δ​​ for​​ Shelter​​ recorded in Dec-22.​​ This suggests that the percentage changes in OER and Shelter will taper downward in 2023, but probably not by much.

However, rental markets do not operate in a vacuum. The cost of owning a home in almost every city in America has become prohibitive​​ for​​ the median income household. This suggests that further declines in RRA3bd, RRAapt and then OER and Shelter​​ might​​ not come into place without significant expansion of the number of rental units. (See CHTR’s front page for a deeper analysis of this issue).​​ 

Excerpts of BEA methodology.

The index for shelter, the service that a housing unit provides its occupants, is one of the largest parts of the CPI market basket—the goods and services that American households consume. Owners’ equivalent rent of residences (OER) and rent of primary residence (rent) measure the majority of the change in the shelter cost consumers experience. All three of these series are published each month in each area for which CPI data are published.

The CPI program collects rent data from each sampled unit every 6 months. Many rents change infrequently, being locked in place for a given lease term, and collecting rent data less frequently allows for a larger sample. Most rents included in the sample are continuing rents, and only a minority of observations are rents which have changed since the previous observation period. The CPI program divides each area’s rent sample into six subsamples called panels. The rents for panel 1 are collected in January and July; panel 2, in February and August, etc.

​​ (Source:https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.htm).

Housing services make up about 16 percent of overall PCE and 18 percent of core PCE.