September 2024 Erdmann Housing Tracker Update, with inflation notes

The boring housing recovery, and the JPow! soft landing, continue unabated.

Figure 1 shows 4 different CPI inflation indexes, relative to the 2% Fed target trend. The non-shelter measures are now 2 years deep back into their flat, maybe slightly downward sloping, trends. I would like to see them just be flat, but the Fed will tend to keep a somewhat downward slope. To keep aggregate inflation at 2%, non-shelter inflation has to be held well below 2%. This is because our public accounting conventions happen to count transfers to land owners as if they are increases in nominal expenditures on production.

That’s probably fine, as long as the Fed just undershoots and doesn’t aim for instability. That’s hard because we still live in the financial dark ages. Instability and recession are popular. Give JPow! the chairmanship for life, and hope by the time he leaves, we can do better without him.

Figure 1

There was a bit of a bump up in non-shelter inflation this month. This is likely noise. Non-shelter inflation is basically back to a pre-2020 trend. I expect it to run at or below 2% for the foreseeable future. The good news in Figure 2 is that rent inflation (using Zillow because the CPI rent measures lag and are currently not very informative) appears to be settling at a trend that is below the pre-2020 trend. Maybe housing production has remained strong enough through the Covid disruption to pull rent inflation down!

Figure 2

Figure 3 shows inflation on a year-over-year basis. (Last month this chart had an error.) Zillow rent trends appears to be settling in quite persistently at just over 3%. That equates to CPI rent inflation of about 2.5%. Could the soft landing be converging on shelter inflation of 2.5% and non-shelter inflation that can stay above 1.5% and still hit the Fed target? That would be fantastic.

Figure 3

Between the bump up in non-shelter inflation and the continued moderation of rent inflation, this month really appears to confirm a new normal. Maybe the unprecedented rent inflation that has eaten away all the gains of working class wage growth since 2015 has finally moderated!

Figure 4

Finally, of course, however that goes, the fact remains that rent inflation has been a combination of general inflation and an excess related to the supply crisis. And, prices are now, and have always been, almost entirely explained by rents. You and I can take a power nap this afternoon while the rest of the housing analyst world tries to figure out how interest rates explain everything.

Figure 5

On that note, it is possible that mortgage rates hit their cycle lows the day before the Fed announced its surprise 50 point rate cut. That is excellent news for housing. It means that inflation will remain positive but moderate, capital is flowing to growth-oriented investments, and a continuation of the soft landing is highly likely.

Figure 6

More discussion and details about tracker data below the fold.