November 2023 Erdmann Housing Tracker Update

I’ll begin, as last month, with a review of recent rent trends. To review:

Pre-Covid, general non-shelter inflation was running at about 1.5% (red in Figure 1) and shelter inflation (rent) was running at a bit over 3% (gray in Figure 1). Because of obstructed housing construction. The Zillow US rent estimate tended to run at closer to 4% (black in Figure 1) because of compositional differences in the measures.

Then, the Zillow measure outpaced the CPI shelter measure because the CPI measure has a lag. Recently, CPI non-shelter inflation has settled back around 2% and the 12 month change in Zillow rent has settled around 3%. Accounting for the measurement difference, this is fantastic news. This means that for the first time in years, the Fed is hitting its true 2% inflation target and also housing construction is healthy enough to pull rent inflation down to about 2%.

Figure 1

This might be a reason why so many pundits and macroeconomists are still worried about inflation. It’s actually at target in both regards for the first time since this briefly happened in 2005, and they are benchmarking to the pre-Covid norm, which was failing in both regards.

Cumulative rent inflation since 2015 has settled in at about 20% above general inflation for more than a year (Figure 2). Recent Zillow rent trends have slightly edged up. But, we could still be moving along this new higher plateau. It would be nice to see this move back down as construction capacity increases in 2024 and beyond, and rents slowly recede back toward a reasonable level.

Figure 2

(I should note that this is just cumulative since 2015. There is much more than 20% cumulative rent inflation in total. One way to think about this is that the random 60 year old house in LA or even Dallas has a rental value much more than 20% higher than it would have in an alternate timeline where homebuilding had been more adequate over the last 30 years.)

In Figure 3, I have updated the Zillow metropolitan area price data for the 50 largest metros (unweighted). This is the average 12 month price change, the band covering 95% of metro areas, and the standard deviation (red). It looks like prices are settling into a low single-digit trend. Variability between cities had gotten quite low heading into Covid. It popped up a bit, and now looks like it could be dropping again.

Figure 3

This is the boring housing market I have been waiting for, as capacity grows, Covid-related migration surges settle down, and the housing market starts the long grind toward supply-side healing. Depending on local conditions, homes in a city might have risen by 10% over the preceding year or fallen 5%. That variance might decline a bit more, but this might be the new normal for a while.

These aren’t strong statements of conviction, but I think this is where we will be until a strong real shock jolts the market in a different direction. Basically, the early 2000s, with a slightly lower average price trend.

The rest is for subscribers below the fold.