Apr-24: Rent Inflation and Market Data

02 Apr 2024


Over the 12 months ending Mar-24, the Consumer Price Index (CPI) increased 3.2%, energy prices increased 2.1% and commodity prices fell by 0.7%. Core CPI rose 3.80% from a year ago​​ (see Table 1) ​​and is still above the Federal Reserve’s 2% target.

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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 5.65% in​​ Mar-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 lagged mortgage rates during​​ a​​ 16 month​​ window of​​ Nov-22 through Feb-24. During that period of a very tight housing markets,​​ and​​ three years after mortgage rate changes, higher mortgage rates, counter-intuitively, drove rent inflation higher.​​ The positive correlation between mortgage​​ rates and​​ the YOY​​ change in​​ OER in the third year after mortgage rates have increased in Chart 3 is above 90%.

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Since renters do not take out a mortgage,​​ why is there such a strong relationship between mortgage rates and both OER and Tenants Rent?​​ I will​​ first, immediately below,​​ attempt to explain the delayed but very strong relationship between mortgage rates​​ and​​ the two BLS data series​​ using​​ market data​​ from two data venders.​​ At the bottom​​ of this report,​​ I discuss​​ how/why mortgages rates impact rental markets.


Table 3 shows the correlation of rent appreciation​​ on​​ three bedroom​​ single family residential (SFR)​​ properties with mortgage rates​​ at​​ nine​​ different lags.​​ The data on YOY change in rents of SFR 3 bedroom properties in Table 3 comes from Altisource.com. I am using an average rent appreciation on 20 different CBSAs vis-à-vis​​ lagged mortgage rates.​​ 

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In the window of time from Nov-22 to Feb-24, the positive correlation between mortgage rates and rent appreciation for three bedroom properties for the 20-CBSAs lagged 18 months in our sample was 70%.​​ Thus, higher mortgage rates in the 18 months before Nov-22 resulted in higher rent appreciation.


Taking the connection between market data and the national OER data reported by the BLS one step further, in​​ Table 4​​ I​​ shows the correlation of​​ national changes in​​ OER with rents​​ appreciation​​ on three bedroom SFR properties at different lags.​​ 

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The highest correlation between OER and​​ the​​ 20-CBSA average of rent appreciation for 3 bedroom properties is 0.90​​ (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​​ median​​ 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 take the 18 months for mortgage rate changes to be fully realized by rental markets data for three bedroom properties from Altisource.com (RRA3bd) from Table 3 and then add to​​ it​​ the 18 months from Table 4 for the OER reported by the BLS to​​ realizes this market information we can understand the 36 month lag​​ between mortgage rates and OER​​ in Table 2.​​ 


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%.​​