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