The main driver of inflation is not what you think it is

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The main driver of inflation is not what you think it is


Home prices rose 18.8% in 2021 and rents rose 17.6% nationwide in the past year, according to industry data. But those prices, the result of a severe supply shortage fueled by municipal government restrictions across the country, weren’t fully shown in inflation data because leases are typically annual.

“The housing shortage will increase the total [consumer price index] to uncomfortable positions for the Federal Reserve, “said Lawrence Yun, chief economist of the National Association of Realtors.” As a result, this high inflation we have is certainly not transient and will remain stubbornly high until the end of the year. “

The problem was highlighted last week when the government reported that CPI rose 7.9% over the past year, the sharpest increase since 1982. The protection index rose 0.5% to February and accounted for more than 40% of the jump in so-called core inflation, which excludes food and energy, making it “by far the biggest factor of increase,” according to the Bureau of Labor Statistics.

While the Fed’s decision this week to start raising interest rates could dampen demand somewhat, the central bank can’t do much about the lack of supply. And many economists expect house prices to further fuel inflation at a time when the Russian invasion of Ukraine threatens to skyrocket energy and food costs, a situation that could add to the darkness. economic performance of voters ahead of the mid-term elections in the autumn.

Fed Chairman Jerome Powell told Congress this month that home price inflation “is really much more than an indicator of the stiffness of the economy.” versus a more “temporary” price increase resulting from supply chain disruptions caused by the pandemic or labor shortages. House Financial Services Chair Maxine Waters (D-Calif.) Said rising housing costs will not be “resolved as quickly as supply chain bottlenecks, due to both the time it takes to develop housing and the lack of investment in affordable housing. accessible “. HUD secretary Marcia Fudge warned that addressing house prices is essential to curb inflation.

But the White House’s options are limited as zoning laws and costly permit procedures that inhibit home construction are largely determined locally. And the structural problems driving house and rental unit prices rise across the country, namely a severe housing shortage to meet growing demand, show no signs of abating.

The remedies to increase the real estate assets have hidden in the massif of the president social spending planincluding investments to stimulate construction of affordable units, are stuck in Congress with little scope for implementation.

This has forced administration officials to explore ways to ease pricing pressures at the margins, including by tying new grants to local zoning reform and expanding funding opportunities for affordable developments.

“We don’t ask the question, ‘Can we completely solve the challenge?’ It’s, ‘Can we make a difference?’ “Said an administration official who spoke on condition of anonymity to discuss the strategy. “And I think there are federal levers here that really make a difference.”

Real estate economists are skeptical given the historically low supply of homes to meet demand. Inventory of homes for sale across the country dropped to an all-time low of 860,000 in December, according to the National Association of Realtors.

The shortage means more people are renting: vacant rental rates dropped to 5.6% in the fourth quarter of 2021, the lowest rate in 37 years. This gives owners the opportunity to raise prices.

But rising rents and house prices will take time to fully enter CPI measure. According to an analysis by the White House Council of Economic Advisors, the rise in hospitalization costs in the inflation indicator is typically delayed by about 16 months before the rise in prices, so inflation headlines are likely to worsen before they do. to improve.

Although economists expect rising mortgage rates to ease demand, it will not be enough to change the growth trajectory of home prices. The average rate for a 30-year fixed-rate mortgage this week rose above 4% for the first time since May 2019 and will likely continue to rise this year as the Fed raises interest rates.

“Interest rates returning to a more normal level should act to cool the housing market over time,” Powell told Congress this month. The Fed raised the benchmark rate by a quarter of a percentage point on Wednesday and signaled further hikes over the next nine months.

Housing advocates and industry lobbyists say the affordability crisis has reached crisis levels. More than 40 housing-related groups sent a letter to President Joe Biden on March 9 asking him to convene an affordability council made up of “a wide range of external stakeholders” and officials from seven different cabinet departments.

“The cost of shelter is less affordable for everyone across the income spectrum, particularly those who are least able to afford it,” they wrote. “The high cost of housing contributes, in part, to the current high levels of inflation and pushes home ownership and affordable rents out of reach for many.”

The White House unveiled a plan in September to add 100,000 affordable homes over three years. So far, the administration has delivered about 10,000 of those homes with programs that extend the “first look” period that prevents institutional investors from grabbing foreclosed homes that are dumped by the government, according to the administration official.

But there is no quick fix. The main drivers of the rise in house prices are “land use policies, licensing costs and zoning restrictions – it’s very determined locally, and it’s very difficult to influence it at the federal level,” he said. Mark Zandi, chief economist at Moody’s Analytics.

“You The housing crisis we find ourselves in has developed over the past decade and it will take a decade or two of coherent policies to get us out of this, “Zandi said.

The housing shortage stems in large part from the decline in construction following the housing collapse that triggered the Great Recession in 2008. Total housing stock grew at an average annual rate of 1.7% from 1968 to 2000, according to a NAR report released last year. This has dropped to 0.7 percent over the past decade. The report estimated that construction of new homes over the past 20 years has been below typical levels by as much as 6.8 million units.

There is good news: New home construction increased in February to its highest level since 2006. But as a sign of continuing construction bottlenecks, the number of housing units allowed but not yet started increased last month to its highest since 1974. .

Construction costs have risen due to rising wood and energy prices and labor shortages. Also, according to Robert Dietz, chief economist at the National Association of Home Builders, the construction time for a typical single-family home, usually around 6.5 months, takes an additional four to 10 weeks.

“This is likely to continue, not only because of the higher price of these materials, but also because of delays and availability issues,” Dietz said. “This means that home price growth is likely to continue despite the fact that mortgage rates will rise.”

Dietz said policies to reduce the cost of lumber – which has more than tripled since February 2020 – would make a difference, since 90% of new single-family homes are timber framed. Rising lumber prices in the last year alone have raised the average price of a new single-family home by $ 18,600, according to NAHB. But the federal government doesn’t help: the United States in November doubled tariffs on Canadian softwood lumberthe latest development in a long import trade dispute.

The homes that are being built, meanwhile, are not the right type for the market: the number of entry-level homes – smaller than 1,400 square feet – “has dropped dramatically since the Great Recession and is more than 80 percent below the mark. amount built in the 1970s, “according to the Council of Economic Advisers. Locally imposed costs often make it too expensive to build cheap units that don’t get a decent return on a developer’s investment.

Demand for first homes has increased as millennials have aged in the peak years of home buying and moved out of parental homes to enter the booming job market.

“This is a problem everywhere – we have a coast-to-coast problem in almost every community,” Zandi said. “I am surprised at this point that housing has not already risen to the top of the political agenda.”

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