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Yet Another Groundhog Day for Rent

I repeat my core key theme for over two years now. People keep telling me rents are falling, I keep saying they aren’t. I thought this may finally be the month the rent trend breaks but it wasn’t.

Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.5 percent in November. Rent of primary residence has gone up at least 0.4 percent for 28 consecutive months! [Note: somewhere along the way I got off by a month. Last month I said 28 months but it is 28 months this month].

The “rents are falling” (or soon will) projections have been based on the price of new leases. But existing leases, more important, keep rising.

Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.

Moreover, some of the alleged declines failed to take in seasonal adjustments. Most people move between May and September. It’s harder to fill a lease in December pressuring rents in the winter.

Let’s tune into the BLS Report for the more details. 

CPI Month-Over-Month Details

• The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in December on a seasonally adjusted basis, after rising 0.1 percent in November.
• The index for shelter continued to rise in December, contributing over half of the monthly all items increase.
• The energy index rose 0.4 percent over the month as increases in the electricity index and the gasoline index more than offset a decrease in the natural gas index.
• The food index increased 0.2 percent in December, as it did in November. The index for food at home increased 0.1 percent over the month and the index for food away from home rose 0.3 percent.
• The index for all items less food and energy rose 0.3 percent in December, the same monthly increase as in November.
• Indexes which increased in December include shelter, motor vehicle insurance, and medical care. The index for household furnishings and operations and the index for personal care were among those that decreased over the month.

CPI Year-Over-Year

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CPI Year-Over-Year Details

• The all items index rose 3.4 percent for the 12 months ending December, a larger increase than the 3.1- percent increase for the 12 months ending November.
• The all items less food and energy index rose 3.9 percent over the last 12 months, after rising 4.0 percent over the 12 months ending November.
• The energy index decreased 2.0 percent for the 12 months ending December, while the food index increased 2.7 percent over the last year.
• Rent of primary residence was up 6.5 percent outpacing wage increases.

Rent vs Owners’ Equivalent Rent

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OER stands for Owners’ Equivalent Rent. It is the price people would pay to rent a house unfurnished, without utilities.

People keep repeating the myth that OER is based off the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

That is false. Rather, that silly question is used to help set CPI weights, not prices. Prices are real measured prices of rent.

Real Measured Prices

Based off minor imputations, some claim OER is not a “real price”.

However, imputations are so minor that the correct attitude is “So what?”

CPI Weights and Other Issues

Rather than bicker over the measured price of OER, the far bigger issue is weight. OER is the single largest component of the CPI with a weight of 26.018 percent as of December 2023. Rent of Primary Residence is 7.714 percent. Shelter comprises 35.170 percent.

Do people pay OER? No they don’t. That’s what’s “unreal”, not the measured price. Roughly 64 percent own their own home with 36 percent renting.

The people who own their own home do not pay rent, they pay a mortgage. Most refinanced at or near 3 percent.

Some economists want to strike OER from the CPI on this basis. The problem I have with this discussion is that “Inflation matters” not just “consumer inflation”. Thus home prices matter. Asset bubbles matter.

The 36 percent of the people who do rent have been royally screwed by Fed policy that inflated assets, especially home prices, in turn causing rents to soar.

The CPI is totally screwed up as a measure of inflation and ignoring OER does not address the issue.

Finally, I expect inflation to be sticker than the Fed believes because when the Fed slashed rates to zero and mortgage rates dropped to 3 percent those refinancing had extra money in their wallets every month going forward.

Why Predictions of When the Price of Rent Will Fall Have Been Wrong

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For further discussion of the rent setup, please see my January 1, 2024 post Why Predictions of When the Price of Rent Will Fall Have Been Wrong

I address seasonality, five different measures of rent, and how the BLS smooths things out.

Why Are Americans in Such a Rotten Mood?

Those who do rent, most likely the lower economic groups, have been royally screwed by Fed policy.

This addresses the question Why Are Americans in Such a Rotten Mood? Biden Blames the Media

People can cut back on some things but rent and food are not in that list.

For the 36 percent of the nation that rents, Bidenomics has been a complete disaster.

Is the BLS Is Overstating Rent and Exaggerating Inflation?

On December 7, I investigated A Curious Claim that the BLS Is Overstating Rent and Exaggerating Inflation

I provide solid evidence that the BLS has been doing no such thing.

Nonetheless, assume inflation slows along with rent. At some point it’s bound to happen.

The key question then becomes: Was inflation transitory or is it the easing that’s transitory?

The extra money home owners have in their pockets, coupled with Biden’s regulations, the end of just-in-time manufacturing, and totally inane energy policy all suggest it’s the current easing of inflation that is transitory, not the initial spike.

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