Latest Research from San Francisco Fed Reveals Potential Slowdown in Housing Inflation as Interest Rates Climb
SAN FRANCISCO, August 7th – A recent study unveiled by the Federal Reserve Bank of San Francisco on Monday suggests that the surge in housing inflation, a significant component of the US Consumer Price Index (CPI), is poised to decelerate significantly in the coming year, with the possibility of transitioning into deflation.
Economists Augustus Kmetz, Schuyler Louie, and John Mondragon of the San Francisco Fed presented their findings in a report:
“Our projected baseline scenario indicates that by the end of 2024, housing inflation in the United States will continue to taper off, possibly turning negative by mid-2024. This represents a sharp shift in housing inflation dynamics and holds substantial implications for overall inflation.”
In this study, researchers at the San Francisco Fed crafted a model using the Case-Shiller Home Price Index and rental price indicators generated by real estate platforms like CoreLogic, Zillow, and Apartment List to forecast housing cost inflation. The results suggest that the interest rate policies implemented by the Federal Reserve have already taken effect.
The report highlights:
“The rapid rise in interest rates since early 2022 might have a substantial impact on the real estate market slowdown, with potential for this deceleration to persist.”
After soaring to a four-decade high last summer, overall inflation in the United States has been gradually cooling down, with a mere 3% year-over-year increase in the US CPI in June this year, but a slight acceleration is expected in July.
However, the core CPI index, which excludes food and energy prices, has seen a slower decline, raising concerns that the Federal Reserve might need to adopt more tightening measures to achieve its 2% inflation target.
Housing accounts for over 40% of the core CPI index and is a crucial component in the Fed’s efforts to manage inflation. The US Bureau of Labor Statistics predominantly measures housing through rental costs, encompassing both monthly payments for renters and estimated costs for landlords to lease similar properties (owners’ equivalent rent). As housing prices rise over time, rents may increase, and vice versa.
Due to the yearly adjustment of rents, changes in housing prices and rents are reflected with a lag in official inflation indicators. The decline in housing prices last year, combined with cooling rental costs, is now contributing to a decline in housing inflation and overall inflation.
The current resurgence in the US real estate market might pose additional challenges for the Federal Reserve.
However, with US housing prices rebounding after a brief dip last year, the Fed’s efforts to control inflation have grown more complex. Analysts are concerned that a sustained recovery in the US real estate market could introduce stickier inflation risks. This could potentially force the Federal Reserve to intensify interest rate hikes to cool down the real estate market.
According to a recent report from Black Knight, as of June, US housing prices have fully erased the decline seen in 2022, reaching both seasonally adjusted and non-seasonally adjusted historic highs. In 30 out of the 50 major cities, housing prices are higher than 2022 levels. Notably, the Northeastern US, particularly the New England region, and major cities around the Great Lakes in the Midwest, have witnessed the most substantial price increases, while prices in Western states like California, Washington, and Oregon continue to decline.
Lorie Logan, President of the Dallas Fed, stated last month:
“The real estate market appears to have bottomed out, and though housing inflation may continue to slow in the short term due to last year’s rental decline, the rebound in housing prices poses upside risks to future inflation.”
Post time: Aug-10-2023