Apr-24: Rent Inflation and Market Data

02 Apr 2024

 

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).​​

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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 5.74% 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.​​ 

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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%.​​