A look at the closely followed Zillow Group rental index shows that last year’s roughly 17% annual increase in rental prices probably peaked, and that the rate of increases has slowed significantly in the past six months.
The trend could give renters moving to a new city better breathing room or someone a better shot at giving themselves a place. But here’s why the rental market has cooled, as evidenced by Zillow Z,
metric or others like it, the Federal Reserve will not be very influential in its fight against inflation.
“We can encourage that in terms of the directional impact it has on us,” Kevin Gordon, senior investment research manager at Charles Schwab & Co., said by phone. “But those metrics, those sources, are not the same as what the Fed is tracking, and what goes into CPI.”
The huge shelter component of the consumer price index, the Fed’s main gauge of inflation, hinges heavily on this question for homeowners: How much do you think your home could fetch if it were rented out?
Zillow, however, relies on monthly changes in rental property listing prices, as do others who let or track the data. That’s why Zillow’s metrics (purple below) show a slowdown in growth, even though CPI (orange) is climbing.
“It shows substantial real rent inflation over the last couple of years, but it also shows that, on an annual basis, it peaked in February, according to our index,” said Jeff Tucker, senior economist at Zillow, on the phone. .
He added that it is not surprising to see the rent component of the CPI continue to accelerate annually, since it tracks something else. “They’re trying to capture the experience of every renter out there,” Tucker said. “But most people haven’t moved in the last year, and they don’t necessarily sign a new lease at the prevailing rates on a listing platform.”
In fact, instead of a recession as expected, CPI for August surprised Wall Street by rising to an annualized rate of 8.3%, fueled by increases in shelter, food and medical care costs. The climbing shelter component suggests that homeowners are still not feeling the pinch of lower property values, even though the housing market is booming in the face of rising borrowing costs.
Stocks were slightly lower in choppy trading on Monday, with the Dow Jones Industrial Average DJIA,
S&P 500 SPX Index,
and Nasdaq Composite Index COMP,
flipped between gains and losses as investors await the Fed rate decision on Wednesday. 10-year Treasury yield TMUBMUSD10Y,
was close to 3.5%.
Even before the Fed is expected to fire another big rate hike on Wednesday, the 30-year fixed mortgage rate has already risen back to 6%. This year’s sharp rise put the brakes on roaring monthly sales and saw mortgage applications fall to their lowest level since 1999.
Read: The Fed is ready to tell us how much ‘pain’ the economy will be. It will not yet hint at the recession though.
Gordon Schwab said the first signs of a sputtering housing market can be seen in the decline in homebuilder data and consumer sentiment, but also with recent sharp declines in the number of home sales. The eventual pullback is expected in property prices, with a delay, and then in rents.
“We’re still in that first part of the cycle,” Gordon said. “That’s the point where we’re trying to hammer inflation. It will take longer for these monetary policy delays to kick in, even if people expect it to change quickly.”