Over the 12 months ending Feb-24, the Consumer Price Index (CPI) increased 3.2%, energy prices decreased 1.9% and commodity prices fell by 0.3%. Core CPI rose 3.76% from a year ago and is still above the Federal Reserve’s 2% target (see Table 1).
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 (also called tenants’ rent, or rent of primary residence). 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 5.74% in Feb-24. The OER is a value calculated by the BLS from a survey and is reported with a significant time lag.
Table 2 shows the correlation of OER with rents on three bedroom SFR properties at different lags.
The highest correlation between OER and a 20-CBSA average of rents appreciation for 3 bedroom properties is 0.91 (at lag 18 months). 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.
The delay caused by the BLS methodology suggests using an 18 month lag on actual reported rent appreciation by Altisource.com to project OER. We do this in Chart 1P. The dotted line in Chart 1P (a projection) shows data for OER and a projection of possible future values of OER if it continues to track Altisource’s 3 bedroom rent values. The YOY OER rent reported by BLS for Feb-24 was 5.97% (shelter came in a 5.74% in Table 1). The actual YOY 20-CBSA average rent appreciation reported by Altisource.com for Feb-24 was 5.06%.
If we project this 5.06% and the other historical RRAs forward 18 months, we get Chart 1P. The dotted 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 far-right observation of the dotted line is the 5.06%. Using historical rent appreciation rates of three bedroom properties from Feb-24 (5.06%) as a measure of OER and also shelter (from Table 1) for Aug-25, we can see the problem facing the Federal Reserve – rent appreciation does not slow down to the 2.0 percent target of the Federal Reserve.
We perform a similar exercise for Tenants Rents using Zillow rents from apartment in multi-unit structures. Table 3 shows the correlation between YOY change in Tenants Rent as reported by the BLS and YOY change in the 12-CBSA average rent appreciation for apartments of all sizes from Zillow.com.
Chart 3P shows a forecasted 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 than for OER (here about 12 months using the correlations from Table 3), but the variation is much larger than the lag between OER and RRA3bd. This larger variation in apartment rents occurred during the pandemic for two reasons: (1) The renter population experienced high turnover. Landlords were able to raise the rents on new tenants moving into an apartments. (2) Many apartment renters do not have signed leases. Landlords were able to charge more for the same apartment and renters had few choices.
Rent appreciation has slowed considerably in the last year as new multifamily apartment buildings have come online in several southern cities. Yet the data shows YOY RRAapt has rebounded in the last few months. The point of Chart 3 (and Chart 2) is that CPI Shelter is going to remain high in the second half of 2024.
