Falling CPI masks a lingering problem facing Americans
With the Consumer Price Index (CPI) falling to more than three-year lows in August, some economists declared that the “battle against inflation is more or less done.” But a deeper dive into the data reveals that Americans’ biggest expense—housing—continues to rise at an uncomfortably high pace.
After analyzing the latest CPI data, macro strategist Charlie Bilello determined that shelter costs increased at an annual rate of 5.2% in August. “That’s the 29th consecutive month above 5%, the longest period of elevated housing inflation since the early 1980s,” said Bilello.
At 5.2%, housing inflation is more than double the headline CPI, which was 2.5% last month.
Over the last four years, the shelter component of CPI has increased by a whopping 23.4%.
“Housing is the sole remaining driver of our inflation worries,” said Morningstar’s senior U.S. economist Preston Caldwell.
Perhaps the most shocking aspect of shelter CPI is it doesn’t adequately capture home-price growth.
“When it comes to the CPI, [shelter] does not mean the cost for homes for purchase,” explained Jessica Lautz, the deputy chief economist of the National Association of Realtors (NAR).
Rather, government economists use “owners’ equivalent rent” to track shelter costs.
According to the Bureau of Labor Statistics, this component measures the “value a homeowner could have received by renting out the good (i.e., the home) rather than using it themselves.”
When looking at actual home values, the data reveals that prices have been rising at a relentless pace since Covid and have yet to decline on a year-over-year basis.
The Federal Housing Finance Agency’s housing price index grew at a double-digit percentage pace during Covid and remains well above 3% on an annual basis.
Based on the latest available figures, the price of a single-family home was $422,600 in July. New builds typically range from $430,000 to $515,000, depending on which calculation is used.
For the typical American, homeownership at these prices isn’t attainable in a high-rate environment.
Housing affordability is one of America’s biggest crises
Despite understating the true extent of housing inflation, shelter CPI can’t hide the fact that housing affordability is one of America’s biggest crises.
Housing affordability has become a key election issue, with Vice President Kamala Harris promising massive down payment assistance for first-time buyers.
While economists disagree about whether down payment assistance would actually restore affordability, they tend to support Harris’ plan to increase housing supply.
According to a recent Zillow report, American builders haven’t kept pace with population growth. As a result, the country’s housing deficit has mushroomed to 4.5 million units.
The affordability crisis isn’t just limited to homebuyers, but “extends to renters as well,” said Zillow’s chief economist, Orphe Divounguy.
“We are in a big hole, and it is going to take more than the status quo to dig ourselves out of it,” said Divounguy.
As Creditnews recently reported, rent prices are stuck right around their 2022 peaks. Research from Redfin determined that 61% of Americans can’t afford a typical apartment at current rental rates.
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