Housing Costs and U.S. Inflation

Housing costs drive U.S. inflation and are projected to decrease by the end of this year, new research shows. The Federal Reserve Bank of San Francisco conducted the study, authored by economists Oscar Jorda and Aren Yalcin. Their research suggests that shelter inflation will trend downward in the coming months. This decline is expected to continue and bring costs to pre-pandemic levels.By 2025, housing costs are expected to return to pre-pandemic levels.

Study Details and Methodology

The Federal Reserve Bank of San Francisco published the study on its website, outlining how Jorda and Yalcin used a model to assess the balance between housing supply and demand. This model is crucial for understanding shelter inflation trends and is based on various indicators. The research evaluates data from the Census Bureau on household formations and housing unit completions, alongside asking rents from Zillow.

The model by Jorda and Yalcin offers valuable insights into shelter inflation trends, according to wsj news.

Shelter Costs vs. Other Goods

The Bureau of Labor Statistics monitors shelter costs through data on new rents, existing leases, and estimated rental values for homeowners. These costs constitute a significant part of the consumer price index. Unexpected shelter cost increases led the Federal Reserve to keep interest rates higher. This action aimed to control the surge in living expenses.

Impact of High Borrowing Costs

Unlike other goods and services, shelter costs do not become cheaper as borrowing costs rise. High-interest rates negatively impact housing supply. Expensive construction increases overall costs and affects shelter. Rental prices eventually slow, but this process is slower. Other sectors respond more quickly to interest rate changes. Housing costs remain less sensitive to interest rates.

Mortgage Rates Decline for Second Consecutive Week

Mortgage rates decline in the U.S. decreased for the second consecutive week, with the average rate for a 30-year fixed loan falling…

Economic Implications

Jorda and Yalcin’s model suggests that rental prices will decelerate gradually. They predict that shelter inflation could decrease to around 2% by the end of the year. By spring 2025, it may return to the pre-pandemic average of 3.3%. The researchers emphasize the forecast’s direction is significant. However, precise numerical predictions or specific timeframes remain less certain.

Historical Data Integration

The model integrates historical shelter inflation data, core consumer price index figures (excluding food and energy), the unemployment rate, and the Federal Reserve’s benchmark rate. This comprehensive approach helps in accurately forecasting future trends in shelter inflation.

Future Outlook

The study indicates that shelter inflation will move toward more typical levels in the coming months. Variations exist in exact predictions. However, the general trend suggests housing costs will stabilize by 2025. This forecast offers a more optimistic outlook for future housing inflation trends.

With this 2-year subscription, you gain full access to daily updates from The Economist and The Wall Street Journal. It includes WSJ, The Economist’s daily news, The Economist Today, The Economist Weekly, archives, and more. Available on iOS, Android, PC, and Mac, it keeps you informed wherever you go.