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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.

​​ 

The 30-year fixed rate mortgage (FRM) ended on October 26, 2023, at 7.79%.​​ This is an increase of 472 bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price gain through Sep-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) was a positive 2.47% - slow but still positive (Column 4 in Table 1 below).​​ 

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 Sep-23 was 6.48%. 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.​​ 

We also see in column 8 that YOY growth in rental rates on apartments in multi-unit structures is still positive and grew at a slightly slower rate in Sep-23 (3.27% vs 2.98 prior month). 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 Sep-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 (RRAapt) are small positive values. As we move from left to right, the dotted bars show mostly negative changes and then they turn into positive increase in HPA across CBSAs. The red bars show the significant one month increase in rental rates for 3-bedroom​​ property and the much slower increases for rents on apartments in multi-unit buildings (which have turned upwards again). Higher mortgage rates have deflated the home price bubble, but not the rent bubble. It is important to note:

• It can take three months for HPA to filter into RRA3bd and RRAapt, 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. 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 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 Nov-19 to Sep-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 exogenous Covid-19 health shock.​​ 

Many renters are now paying more than 7.0 percent more of their income to pay their rent in at least four cities than they were in Nov-19.​​ 

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 16 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 decline in 2020.

Actions by the Federal Reserve to slow the economy have led to the weekly 30-year fixed rate mortgage (FRM) on August​​ 31, 2023, ending at​​ 7.18%.​​ This is an increase of​​ 411​​ bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price gains through Jul-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have flattened (Column 4 in Table 1​​ below).​​ 

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​​ Jul-23​​ was 4.75%. 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.​​ 

We also see in column 8 that YOY growth in rental rates on apartments in multi-unit structures is still positive and grew at a slightly slower rate in​​ Jul-23​​ (2.83% vs 3.28 prior month). 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​​ Jul-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 (RRAapt) are small​​ positive​​ values.​​ As we move from left to right, the dotted bars show mostly​​ negative changes and then​​ they​​ turn into​​ positive increase in HPA across CBSAs. The red bars show the significant one month increase in rental rates for 3-bedroom property and the much slower increases for rents on apartments in multi-unit buildings (which have turned downward again). Higher mortgage rates have​​ deflated the home price bubble, but not the rent bubble. It is important to note:

• It takes three months for HPA to filter into RRA3bd and RRAapt.

• 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 income:

Rents are mostly rising at a rate above 3.0% per year. 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. 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​​ 55​​ 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 Jun-20 to​​ Jul-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 exogenous Covid-19 health shock.​​ 

Renters are now paying more than 20 percent more of their income to pay their rent in at least four cities than they were in Jun-20. On the left-hand-side of the chart, in only three CBSAs, 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 16​​ 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 decline in 2020.

Actions by the Federal Reserve to slow the economy have led to the weekly 30-year fixed rate mortgage (FRM) on August 10, 2023, ending at​​ 6.96%.​​ This is an increase of 389 bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price gains through Jul-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have flattened (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​​ Jun-23 was 4.82%. 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.​​ 

We also see in column 8 that YOY growth in rental rates on apartments in multi-unit structures is still positive and grew at a slightly slower rate in​​ Jun-23 (2.83% vs 3.28 prior month). 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 Jun-23 for our 20 CBSAs.

The chart shows that, across CBSAs, RRA​​ does not​​ seem to move in-step with HPA. As we move from left to right. The clear bars with a horizontal line (RRAapt) are small, but positive values. The dotted bars show mostly positive increase in HPA across almost CBSAs. The red bars show the significant one month increase in rental rates for 3-bedroom property and the much slower increases for rents on apartments in multi-unit buildings (which​​ have turned downward again). Higher mortgage rates have deflated the home price bubble, but not the rent bubble. It is important to note:

• It takes three months for HPA to filter into RRA3bd and RRAapt.

• 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 income:

Rents are mostly rising at a rate above 3.0% per year. 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. 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 Jun-20 to​​ Jun-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 exogenous Covid-19 health shock.​​ 

Renters are now paying more than​​ 20 percent more of their income to pay their rent in at least four cities than they were in Jun-20. On the left-hand-side of the chart, in only three CBSAs,​​ 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 19 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 decline in 2020.

Over the 12 months ending May-23, the Consumer Price Index (CPI) increased 4.0%. The energy index decreased 11.7% and commodities rose by only 2.0%. Core CPI rose 5.3% from a year ago (Table 1) and is still above the Federal Reserve’s 2% target.​​

Other sections of the economy​, however, are​​ not slowing as fast as energy and 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 2,​​ we see that​​ shelter increased​​ by 8.05% in May-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 solid line in Chart 1 shows data for OER_YOY. The far-right observation is the 8.05% for shelter for May-23 that we see in Table 2. The dotted line is the year-over-year percentage change in rents on three-bedroom properties (lnRRA3bd_YOY) for the 20 CBSAs tracked by the CHTR lagged 24 months. The data -- the average of rents on 3-bedroom properties for twenty CBSAs -- is a closer apples-to-apples match to OER than rent data on apartment units from Zillow.com. We notice that with a lag of 24 months the two series appear highly correlated (correlation=0.9)​​ from the time of Mar-20 to May-23.​​ 

The survey process used by the BLS results in OER being reported with a 24-month 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 by about​​ 12 to​​ 24 months. If we recognize the roughly 24-month lead between lnRRA3bd and OER, we can use a projection of lnRRA3bd (p_lnRRA3bd), to see the problem facing the Federal Reserve in Chart 2.

OER is falling from its high of early 2023, but the dotted line (actual data already reported by Altisource.com of rents paid on three-bedroom properties pushed forward) shows that the declines only go so far. The chart pushes those observations of lnRRA3bd forward 24 months. If​​ we would use only this variable (p_lnRRA3bd), OER to be reported in 2025-05 will likely range near 5.00%. This is higher than the Federal Reserve’s target of 2.0%​​ (dotted red line). We, however, also need to consider rents of apartments in multi-unit structures.

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​​ 9​​ months), but the variation is much larger than the lag between OER and RRA3bd.​​ The correlation between the two variables is 0.87.

This​​ larger variation during the pandemic occurred​​ 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​​ considers​​ existing rentals, while Zillow.com only examines​​ 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​​ (between 8.0% and 4.0%)​​ in the second half of 2023.