Zillow sees past peak rental growth, but that’s not what the Fed is tracking

Zillow sees past peak rental growth, but that’s not what the Fed is tracking

A look at Zillow Group’s closely monitored rent index shows that last year’s annual rise in rents at about 17% was likely the peak, with the rate of increase declining dramatically over the past six months.

The trend could give tenants moving to a new city more breathing room or give someone a better chance of providing their own place. But here’s why a cooling rental market, proven by Zillow Z,
-3.60%
metrics or similar won’t have much impact on the Federal Reserve in its fight against inflation.

“We can applaud that in terms of how it affects our direction,” said Kevin Gordon, senior investment research manager at Charles Schwab & Co., speaking over the phone. “But those stats, those sources, aren’t the same as what the Fed is tracking and what goes into CPI.”

The massive lodging component of the consumer price index, a key inflation gauge for the Fed, depends largely on this question to homeowners: How much do you think your home could earn if it were rented out?

However, Zillow relies on monthly changes in rental listing prices, as do others who rent homes or keep records. That’s why Zillow’s stats (purple below) show a slowdown in growth, even though the CPI (orange) has risen.

Rental data points to declines from dramatic rise

Mizuho Securities USA

“It shows that rental inflation has gotten really strong in recent years, but it also shows year-on-year that it peaked in February, according to our index,” Jeff Tucker, senior economist at Zillow, said by phone.

He also said it’s no surprise to see CPI’s rental component still accelerating year-over-year as it follows something else. “They’re trying to capture the experience of all renters,” Tucker said. “But the majority of people haven’t moved in the past year and don’t necessarily sign a new lease at the prevailing rates on a listing platform.”

Indeed, instead of retreating as expected, the August CPI shocked Wall Street by rising to 8.3% year-on-year, driven by increases in the cost of shelter, food and medical care. The climbing shelter component suggests that homeowners have not yet felt the sting of lower property values, even as the housing boom has solidified in the face of increased borrowing costs.

Shares were slightly lower in choppy trading Monday, with the Dow Jones Industrial Average DJIA,
+0.64%,
S&P 500 Index SPX,
+0.69%
and Nasdaq Composite Index COMP,
+0.76%
alternating between gains and losses as investors awaited the Fed’s rate decision on Wednesday. The yield on 10-year Treasury bonds TMUBMUSD10Y,
3.506%
was almost 3.5%.

Even before the Fed is expected to fire another sharp rate hike on Wednesday, the 30-year fixed mortgage rate has already risen to 6%. The sharp rise this year put the brakes on roaring monthly sales and led to mortgage applications falling to the lowest level since 1999.

Read: The Fed is willing to tell us how much ‘pain’ the economy will suffer. However, it still won’t indicate a recession.

Schwab’s Gordon said the first signs of the housing market’s sluggishness can be seen in the decline in homebuilder data and consumer confidence, as well as the recent sharp declines in home sales volumes. The decline is expected to eventually filter through to property prices, with some lag, and then to rents.

“We’re still in that first part of the cycle,” Gordon said. “That’s the point we’re trying to cover with inflation. It will take longer for these monetary policy slowdowns to take effect, even if people expect it to change quickly.”

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