Housing rebound poses challenge for Fed’s inflation fight

Demand for homes around the country continues to outpace supply, despite a rapid rise in borrowing costs spurred by the US central bank. While signs of easing price pressures have some policymakers eyeing the end of their tightening campaign, they could end up having to increase rates higher or hold them there for longer if the resilient housing market leads to slower progress on inflation, economists and Fed officials say.

“If housing begins to recover more meaningfully, that raises the risk that inflation is going to be more sticky,” said Torsten Slok, chief economist for Apollo Global Management. “The real risk here is, meaning from a markets perspective, that the Fed has to step harder on the brakes.”

Policymakers are poised to lift rates by a quarter point following a two-day policy meeting Wednesday, bringing the target on their benchmark rate to a range of 5.25% to 5.5%. Projections released by Fed officials in June showed most of them foresee at least one more rate hike by year end.

Inflation is cooling after soaring to a 40-year high last summer, with the consumer price index rising by 3% in the 12 months ending in June, one-third of the rate seen a year ago. But so-called core measures of inflation, which strip out volatile food and energy prices, are proving more stubborn and leading to worries that it could take some time to bring price gains down to the Fed’s 2% goal.

Shelter costs, which account for roughly 40% of the core CPI basket, are an important part of that battle.

The Bureau of Labor Statistics, which calculates the CPI, mainly measures shelter through the cost of rent, including what renters pay each month and an estimate of what a home owner would be paying if they rented out a similar place. Rising home values can push up rents over time, as landlords factor in what they could receive if they sold the property.Since rents are typically updated about once a year, changes in home prices and rents trickle into the official inflation metrics with a lag. The home price declines seen last year, combined with a cooling in rental costs, are now contributing to a drop in shelter inflation and overall price gains.

But a resurgence in home prices could slow that progress and potentially lead to more persistent inflation next year.

“The housing market even looks like it may have bottomed out,” Dallas Fed President Lorie Logan said earlier this month at a conference in New York. “While housing inflation will likely continue to soften in the near term as a result of progress on rents last year, a rebound in housing would pose an upside risk to inflation down the road.”

Tight Inventory
A key driver of the rebound in prices is a stark shortage in housing supply. There were 1.08 million homes for sale last month, the lowest June inventory on record, according to the National Association of Realtors.

Inventory is low in part because many homeowners who locked in lower mortgage rates early in the pandemic are reluctant to give them up by listing their homes for sale. The shortage is depressing sales of previously owned homes, which fell to a five-month low in June. But it is also pushing up prices, as buyers battle over the homes that do get listed. The median home sale price in the four weeks ending July 16 was $382,500, up 2% from a year earlier, according to Redfin. Prices rose more sharply in some cities, including a 12% increase in Milwaukee, a 10% rise in Miami and a 9.5% bump in Cincinnati.