Quiver Quantitative - The U.S. Federal Reserve's confidence in cooling housing inflation may be facing a significant challenge in the near future. While Fed officials anticipate a decrease in housing inflation, a crucial factor in their overall strategy to control price increases, the real test lies ahead. The looming issue is the drying up of new apartment supplies coupled with a persistent shortage of single-family homes, potentially leading to renewed price pressures in a sector that accounts for about a third of the Consumer Price Index.
Despite the Fed's 2% inflation target focusing on an index less sensitive to shelter costs, housing and rent dynamics remain a pivotal, yet unresolved, aspect of their inflation battle. The Fed faces a delicate balance: finding a rate setting that checks overall demand without stifling the supply of new homes and apartments. Jay Lybik from CoStar highlights the complexities involved, noting the sharp decline in new apartment unit volumes expected next year. This scenario paints a picture of heightened housing affordability concerns, which have already intensified during the pandemic with median home prices jumping 50%.
Market Overview: -US housing inflation expected to cool soon: The Fed anticipates a decline in housing inflation, crucial for achieving their broader inflation goals. -Potential for future price pressure: A projected decline in new apartment construction and continued low single-family home inventory could lead to future price increases. -Fed faces balancing act: Striking a balance between controlling inflation and preventing a housing supply crunch remains a challenge.
Key Points: -Potential supply shortage: A decline in new apartment construction and limited single-family homes raise concerns about long-term availability. -Fed's limited ability to address supply issues: While acknowledging the problem, the Fed lacks direct tools to address housing supply. -Shelter costs remain high: Despite recent declines, shelter inflation persists higher than pre-pandemic levels, causing concern and delaying potential rate cuts.
Looking Ahead: -Shelter inflation decline expected in the short term: Relief from high housing costs is likely in the coming months, potentially impacting overall inflation positively. -Long-term concerns remain: The potential for a future supply shortage could reignite housing inflation in the medium to long term. -Fed needs a clear understanding of market trends: Accurate data on housing supply and demand dynamics is crucial for informed policy decisions.
Fed Chair Jerome Powell acknowledges the long-term challenges in housing availability, a situation beyond the Fed's tools to address directly. The housing market's diversity across the U.S., influenced by local zoning rules, politics, and land prices, further complicates the picture. However, financing costs, heavily swayed by the Fed, are crucial to future housing supply decisions.
For the immediate future, a "disinflation" in overall shelter costs seems almost certain as the pandemic-era spike in rents and home prices becomes a thing of the past. This trend is essential for the Fed to gain confidence in declining inflation and begin considering rate cuts. Yet, the potential long-term housing supply constraints may pose an ongoing risk of faster inflation, underscoring the intricate interplay between monetary policy, housing supply, and market dynamics.
This article was originally published on Quiver Quantitative