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: An inflation storm hits the US actual property market

Rapidly rising housing costs have helped drive inflation to a 13-year high. But the way government statisticians track consumer goods prices may fail to appreciate how explosive the rise in home prices has been in recent months.

Housing costs rose 0.4% between April and May, according to the latest monthly consumer price index, released Thursday by the Bureau of Labor Statistics. Compared to the previous year, apartment prices for tenants and homeowners alike rose by 2.2%.

Overall, the rise in house prices accounted for more than a quarter of the total rise in inflation in May, suggesting how heavily government economists weight this category of spending.

But if that 2.2% figure is wrong based on your own experience buying or selling a home, it comes as no surprise. Not everyone agrees on the rate of house price growth.

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The latest edition of the Consumer Price Index showed house prices rose 2.2% over the past year, while other reports suggest house prices rose more than 13%.

Other data indicated a much faster pace of property price and rental growth, well above that level.

The latest Case-Shiller Home Price Index report for March showed house prices rose more than 13%, the highest growth rate since 2005.

How does the CPI calculate housing? First, residential units themselves are not included in the CPI market basket.

Second, rental data are collected every six months to determine price developments. The calculations for most of the other CPI positions are made monthly or bi-monthly.

"Like most other economic ranks, the CPI views residential units as capital goods rather than consumer goods," says the Bureau of Labor Statistics. "Spending on the purchase and improvement of houses and other housing units is an investment, not a consumption."

“The cost of accommodation for apartments used by tenants is rent. For a owner-occupied unit, the cost of housing is the implicit rent that owners would have to pay if they rented out their houses, ”she adds.

Government pollsters ask homeowners, "If someone rented your home today, how much do you think it would rent monthly, unfurnished, with no extra charges?"

And they ask the tenants: “What is the rental price for this unit for your (household) including the additional fees for garage and parking facilities? Do not include direct payments from local, state, or federal agencies. What period does that cover? "

Housing is not like other goods

"The rate of real estate appreciation does not compare to inflation," said Mark Fleming, chief economist at title insurer First American Financial Services FAF.

First of all, housing is a very basic necessity. "The demand for accommodation doesn't go away – it just moves around," said Fleming. In other words, if airfares soar 7% like last month, families might choose not to take a summer vacation.

This decision is not so easy when it comes to living. When housing costs rise, it can have a "cascading effect on extremely low-income renters," said Andrew Aurand, vice president of research for the National Low Income Housing Coalition.

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About 9.2 million “extremely low-income” renters spend more than a third of their income on accommodation-related expenses

– Andrew Aurand, vice president of research for the National Low Income Housing Coalition

Research by Aurand's organization has shown that more than 9.2 million "extremely low-income" tenants are burdened with housing costs, which means that they spend more than a third of their income on housing-related expenses. Many of these households spend more than 50% on housing and leave little money for other purchases.

The alternative for these households would be to lose the roof over their heads. This has become a reality for many Americans in recent years. A 2019 study published by the Trump administration estimates that more than 500,000 people across the country sleep outdoors each night, while many more are surfing the couch or using shelters for unoccupied people.

In the meantime, buying a property for people who own their own home is not the same as buying a banana, for example. Owning this banana will not bring you any financial benefit in the long run, while you can expect and benefit from a home's appreciation in value. But a home isn't purely a fixed asset like a stock – it's a mix of both.

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Home prices can go up because the actual structure itself can be worth more – thanks to the rising cost of labor and lumber – but also because people see it as a capital investment.

Home prices can go up because the actual structure itself can be worth more – thanks to the rising cost of labor and lumber – but also because people see it as a capital investment.

As a result, economists or government statisticians may disagree about rising house prices and what they mean to consumers.

"In a market environment in which the prices for buying a home are rising so quickly, the economist would say that this is the price increase for the capital goods," said Robert Dietz, chief economist of the Federal Association of Builders. "But for the buyer it means a higher cost of living."

Why real estate inflation is different

People experience inflation differently from most other products compared to most other products, and that makes it difficult to measure.

For the typical homeowner, housing costs probably haven't changed all that much in the past year.

“If you have a fixed mortgage on your house year after year, how much will your cost of living in that house change? Not very much, ”said Fleming. "The only things that change year after year are your tax and insurance trusts."

Even with tenants, the apartment price does not move higher or lower from month to month. For this reason, the Bureau of Labor Statistics collects housing data less often than most of the other items in the CPI basket.

For tenants and buyers, you will encounter the changing costs when something changes in the way you live: when you move into a new home, sign a new lease or refinance your mortgage.

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Americans need to know how much housing costs are rising and falling – not least because residential real estate makes up such a large part of the country's economy.

But Americans need to know how much housing costs are rising and falling – not least because residential real estate is such a large part of the national economy.

The government's consumer price index calculates “imputed rent” – essentially the amount a homeowner pays for their home rather than a landlord.

Otherwise, the GDP would actually fall, said Dietz, "because money that would be a rental payment on the marketplace that would be paid by a tenant suddenly disappears."

To overcome this challenge, the government relies on survey data to produce its estimates of housing costs for renters and homeowners. In the case of tenants, they are simply asked how much they are paying for the apartment.

But owners aren't asked what their mortgage payments are – after all, not everyone has a mortgage. Instead, they are asked to estimate how much rent they could charge for leasing their current home.

Government statisticians regularly survey the same cohort of Americans to present their results and track changes over time to estimate housing costs.

"Inflation and (changes in) house prices have generally leveled out," said Jonathan Needell, president and chief investment officer of KIMC, a private real estate investment company. He added that rising house prices "have exceeded inflation in some cases".

However, some researchers have argued that this approach can also be an understatement and / or is slow to pinpoint true inflation in the property market.

A new analysis from Fannie Mae
FNMA,
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showed that there is typically a lag between when home prices actually rise and when that price growth is reflected in inflation reports such as the consumer price index.

The role of COVID-19

The shifts in housing preferences and needs caused by the COVID-19 pandemic have also made it difficult for us to gauge the impact of inflation on the housing market.

Wealthier Americans, many of whom were suddenly able to work remotely, chose to move from the big cities to bigger and cheaper homes in the suburbs, often saving money in the process. As a result, rental prices fell in more expensive areas.

But rents have even risen in cheaper areas. Americans who lost their jobs because of the pandemic rushed to find cheaper housing, which drove up rents for the cheapest apartments and houses in the suburbs.

These effects are beginning to dissipate, but will continue to weigh on official measures such as the consumer price index in view of the emerging time delays.

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Americans who lost their jobs because of the pandemic rushed to find cheaper housing, which drove up rents for the cheapest apartments and houses in the suburbs.

So is living getting more expensive quickly? The answer, economists agree, is yes. First American Financial Services has its own benchmark, the Real House Price Index, which compares nominal price gains to Americans' ability to afford to buy a property based on prevailing interest rates and household income.

For a period between 2018 and early 2020, the Real House Price Index fell because Americans' purchasing power rose faster than home prices, Fleming said. That is no longer the case.

"Deflation has turned into inflation, not because interest rates went up – they went up just a little – but because house prices are just insane," Fleming said.

The reason property prices are rising so quickly is pretty simple. Housing construction practically stalled after the Great Recession as the construction industry recovered.

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"Deflation has turned into inflation, not because rates went up – they went up just a little – but because house prices are just insane."

– Mark Fleming, Chief Economist at First American Financial Services

As a result, new housing construction has not kept pace with population growth and the creation of new households.

As a result, there has been a serious housing shortage in the housing market, just as millennials have begun to marry and have children – traditional hallmarks of home buying.

With the pandemic, the move to remote working and low interest rates only made things worse.

The primary solution to countering soaring housing inflation is to build more houses – something easier said than done. "Some of the challenges we face on the supply side of residential construction will persist well into 2022," said Dietz.

These challenges range from high wood costs to the lack of skilled workers to complete construction projects. Another factor: The state-wide zoning regulations prevent the construction of denser living space in many cities and thus effectively drive up home prices and rents.

After all, building new homes by itself isn't going to make things easier for all Americans. Because of the high cost, it is easier for home builders to build more expensive homes, although the demand and competition for entry-level properties is strongest.

Over time, this increasing concentration in the lower tier of the housing market is driving up prices for those who can least afford it.

"There's this argument that if you just build up a bigger supply to meet demand, it will ultimately help ultra-low and very low-income tenants as well," Aurand said. "But the market is not going to adequately serve tenants with extremely low incomes in particular."

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