Although gasoline prices get most of the attention in reporting on inflation, there’s another element that’s pushed the numbers up—soaring rents for housing. And even if rent increases slow down, our affordable housing crisis will continue due to the lack of housing supply and persistent low incomes.
The data are grim. The national real estate brokerage Redfin showed January’s average asking rents for housing up 15.2% from last year. Rents have moved up in parallel with rising home prices, and as more people are priced out of home buying, they’ve increased upward pressure on rents.
We may be seeing a slowdown in rent increases. The online rental service Apartment List says that 2021’s rent growth was “staggering,” but over the past four months “monthly growth has averaged just 0.2 percent.” Most of 2021’s growth “took place last spring and summer,” although February’s increase was 0.6 percent, so we may not be out of the woods yet.
Higher rents are a national phenomenon. Redfin found 2021 rents rose in 48 of the nation’s 50 largest metros, with the highest increases in Portland (+39%) and Austin (+35%). I guess moving to Texas may not be as big a money saver as some people thought.
Higher rents are linked to the continuing rise in home prices. In 2021, the Case-Shiller housing price index rose 18.8%. The analysts tell us that’s “the highest calendar year increase in 34 years of data and substantially ahead of 2020’s 10.4% gain.”
Higher rents and higher housing prices reflect America’s lack of housing supply. We failed to build enough housing after the Great Recession and financial collapse starting in 2007, and that failure has caught up with us now.
We have been seeing more permits for new construction. But permits aren’t actual housing, and actual construction may be slowing from a combination of higher priced materials and supply chain problems, rising interest rates, and uncertainty generated by Russia’s vicious invasion of Ukraine. Earlier this month, the National Association of Home Builders reported “its measure of single-family homebuilders confidence fell to a six-month low in March.”
And housing has a big impact on our measures of inflation. Our overall inflation index, the Consumer Price Index (CPI), is made up of several components. The “shelter index” is almost 1/3rd of CPI, and around 40% of “core” CPI which excludes volatile sectors like energy.
There’s a lag between when rent increases occur and when they show up in the index, so even if rents slow down, their rapid rise to date will keep upward pressure on inflation measures. Economists at the Federal Reserve Bank of Dallas found that “current house price growth is most strongly correlated with rent inflation 18 months later.” That means rising house prices will keep pushing current inflation measures upward.
But even if we get some inflation relief from energy prices and supply chain bottlenecks, high housing costs (both rents and purchases) have a very big impact on inflation. And unlike gas prices, where politicians can suspend gas taxes or propose cash rebates to car owners, there are fewer short-term policy options on housing costs. (Not that the suspensions or rebates are a good idea.) You can’t just wave a wand and suddenly create new houses.
Rising housing costs are a hardship for many. Traditionally, we’ve said a household is burdened if it spends over 30% of its income on housing and utilities. Prior to the pandemic, researchers at Harvard reported that “nearly half of all renter households (spent) more than 30% of their incomes on rent and utilities each month.” (Underscoring the essential nature of shelter, their article is entitled “The Rent Eats First.”)
Of course, the lower the household income, the worse the problem. The National Low Income Housing Coalition found that the combination of rising prices and inadequate wages means “an affordable rental home is out of reach for millions of low-wage workers and other low-income families.”
There’s an old saying that “a week’s wages should pay a month’s rent,” but that’s not possible anymore for many working families. The Coalition’s analysis found no state in the entire USA where a worker earning the minimum wage could “afford a modest two-bedroom rental home…by working a standard 40-hour work week.”
Long-term, there are good ideas for fixing both housing supply and low incomes. But there’s no quick fix. For too long, we’ve allowed housing costs to soar while refusing to increase supply. On the income side, we’ve failed to increase the minimum wage, support unions, and take other steps to boost incomes for many working people. As the inflation and housing numbers show—and are likely to keep showing—we’re now paying the price for those policy failures.