The Expert Podcast

There are some hidden data within the inflation release from the federal government that gives some indications about what might be happening with real estate. A lot of times, people look at real estate affecting inflation, but let's take a look and look at the data in reverse and see how that affects people's opinions and outlooks on what's going to happen with real estate. There's an article from the Wall Street Journal that says that housing could provide fuel for inflation.

But let's look at it backwards. It says that climbing housing costs are set to keep inflation elevated, which is a challenge. Some rents have been up 15-20 percent, and real estate prices have gone up 15-20 percent. What's important is that housing inflation represents about two-fifths, or 40 percent, of the core consumer price index and one-sixth of the preferred inflation gauge, meaning that it's skewed towards the CPI, not towards the inflation gauge. Rent inflation is part of that because of the way the Labor Department captures rental prices. Rent inflation could continue to rise and peak at about six percent over the next several months, which would be a 36-year high, never been higher than that for rental inflation.

What about purchases? Well, home purchase prices were up 20 percent. Government agencies don't take home prices directly into account when calculating inflation because they consider it a long-term investment. But think about it: between a home price being up 20 percent and mortgage rates going from 3 to 6 percent, that's going to be an inflationary factor in most household budgets.

And here's the key right here: demand for rental housing could continue to rise. Rent-based components of inflation are likely to prove relatively impervious to the tightening of financial conditions. What does that mean? Let's translate that from economic talk to plain English. What that means is that rents are still going to stay high, and all they're going to do with raising interest rates isn't going to change rents. In fact, raising interest rates might have the inverse result on rents. Because if you're a rental property owner and you're buying a property with a higher interest rate, you have to charge more rent to pay for that interest. Even if you're not buying a property and you already own a property, looking at return rates (ROI) on your investment is going to have a different expectation if interest rates go up. Look, if you can get 5 or 6 percent in a CD or money market because the interest rates are higher, you might want to get a higher return on your real estate, which has a higher risk and higher liabilities. So, the Federal Reserve jacking up rates might actually make rental prices go up. It might have a slight downward pressure on some other items, but it's going to make inflation go higher. It might have the backwards effect of what they're trying to do.

The demand is still high. There's a company that owns 58,000 single-family homes for rent, and they received record inquiries for new leases in May. So, the price point of new homes going up and the interest rates are maybe keeping some people out of the purchase market and keeping them in rental demand. The backdrop is fantastic. Their CEO said, "How can they afford it?" Well, according to apartment owners, their tenants are able to tolerate rising rents because incomes are growing solidly. Most customers have money in their pocket. This is the elephant in the room. This is what's keeping home prices up: people have money. When they don't have money, that's when there's going to be a problem. When jobs start to fail, when savings are depleted, when incomes start to go down, and company revenues go down, that will be the canary in the coal mine when house prices and rental prices start to reduce.

There's another hidden factor. This big rental company said that 20-25 years ago, 25 percent of their tenants moved out to buy a house instead of renting. Now, it's closer to 10 percent, and that's even going lower because mortgage rates are going up. People are staying in rentals longer because they either can't or don't want to buy, and that's forcing a higher rate of rental increases on tenants across the board. Low-income, workforce housing, market-rate housing, luxury housing— all the rents are going up. Even mobile home parks are seeing rents skyrocketing. Some people's lot rent in a mobile home park is doubling, from 4500 up to close to 1000, and that's causing a huge domino effect in the housing market.

What are you seeing in your area, and what are your plans for your residency? Are you continuing to rent, or do you think now's the time to buy a house?