Ever-increasing housing costs are not only straining budgets – they also are the biggest contributor to the nation’s bump in inflation, according to a report released Tuesday by the Bureau of Labor Statistics.
The consumer-price index, a widely used measure of inflation, moderated to 6.4% in January from a year earlier and down from 6.5% in December, the Labor Department said.
But housing costs – which make up 40% of the index – rose 0.7% for the month and increased 7.9% from a year ago.
“Home prices rose much faster than incomes over the past three years,” said Bright MLS Chief Economist Lisa Sturtevant. “The Fed’s rate increases, which have led to higher mortgage rates, have made the cost of buying a home even more costly.”
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Disconnect between wages and housing costs
The price of a typical home rose 43% in the past three years, far surpassing the average wage increases of 16%.
The median price of a home went from $254,900 in early 2020 to $366,900 in December 2022.
“Slowing demand in the housing market was part and parcel of the Fed’s strategy designed to cool consumer demand to bring down inflation,” says Sturtevant.” But as the cost of borrowing to purchase a home rises, it disproportionately impacts young, prospective first-time homebuyers and widens the already sizable wealth gap in the U.S.”
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Rental demand continues to be strong
In January, tenants of apartments and single-family homes paid 8.6% more in rents this year versus 12-months ago.
“The monthly change was 0.7% or 8.8% on an annualized basis. That was a big contributor to the overall consumer price inflation running at 6.4% and well above the comfort level of 2% inflation,” said Lawrence Yun, the chief economist for the National Realtors Association.
While rent growth has moderated, renter demand remains strong across the spectrum of apartments, single-family rentals and manufactured housing even as the economy slows and signs of recession remain elevated, says Al Otero, portfolio manager at Armada ETF Advisors.
The key economic data point for residential rentals is employment, which remains resilient.
But Yun noted that rent relief is on the way.
“Apartment construction activity is at a 40-year high. As these new empty units steadily reach the market, rent growth will tame down. That will also pull back the overall consumer price inflation.”
What will happen to mortgage rates?
As the stubbornly high and rising rents are keeping consumer prices elevated, the Federal Reserve cannot yet relax its monetary tightening policy, said Yun.
“Mortgage rates could linger at around 6.5% for a few more months before heading below 6% by summer and maybe even 5.5% by the end of the year.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
