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Post: : Housing keeps getting more expensive. Is there relief in sight?

The cost to keep a roof over your family’s head has increased at the fastest pace in decades, putting serious pressure on Americans’ wallets.

The shelter component of the Consumer Price Index increased 0.5% between February and March, in line with the previous month, according to the report released Tuesday. The cost of rent, however, decreased slightly on a monthly basis, while the equivalent cost for homeowners stayed flat.

Nevertheless, annual growth set records. The cost of shelter has risen 5% over the past year, representing the largest increase in 40 years.

The cost of shelter represents the biggest component of the overall Consumer Price Index, reflecting the importance of rent and mortgage payments in a household’s budget. After all, housing is a necessity, and most families spend a third or more of their take-home pay on either rent or the costs associated with owning a home.

At the same time, the way that the CPI measures housing-related inflation means that the index is often late in picking up movements in home prices and rents reflected in other reports. To produce the shelter component of the overall index, the federal government relies on survey data and rotates among groups of Americans to capture changes in home prices.

But in people’s everyday lives, the actual cost of housing doesn’t change from month to month. Renters will only experience price hikes when they move or renew a lease. Homeowners who buy with a fixed-rate mortgage would see little change in housing costs at all, aside from factors like utilities or taxes.

Consequently, Americans typically see the run-up in housing costs well before it’s reflected in the Consumer Price Index. That was no different in this latest report.

The shelter component of the index “continues to play catch-up to home prices as activity returns to cities and leases reset,” Katherine Judge, director and senior economist at CIBC Capital Markets, wrote in a research note.

“Judging from the deviation in the home price-to-rent ratio relative to its normal level, there is ample room for rent prices to rise further,” she added.

How rental and home-buying markets compare

The driving forces behind the rising cost of renting and homeownership are similar in a lot of ways. Overall, the U.S. has a shortage of housing — the result of years of under-building following the Great Recession. That shortage came to a head when the pandemic caused many households to re-evaluate their living arrangements, prompting some to make moves to larger homes sooner than they might have otherwise.

The rental market has also seen a return to normalcy. Many families temporarily decamped to the suburbs and exurbs at the height of the pandemic. The slow return to the office has brought many people back to major cities. Over time, people in these areas saw their rents surge higher, as landlords were able to eliminate the rent breaks they relied on in the earlier stages of COVID.

Plus, as tenants have moved to avoid eviction — or due to being evicted over the past couple years — landlords have slowly been able to return their businesses to normal operations.

The home-buying market, meanwhile, has been roiled recently by the surge in mortgage rates. In recent months, interest rates on home loans soared in anticipation of the Federal Reserve’s shifting stance. The Fed has hiked short-term rates and ceased its new purchases of mortgage-backed securities — both of which have an effect on mortgage rates.

“The surge in mortgage rates over the past quarter has pushed the cost of ownership much faster than rents,” said George Ratiu, manager of economic research at Realtor.com. Data from Realtor.com data has shown that rising interest rates for a typical 30-year fixed-rate home loan have pushed the monthly mortgage payment on a median-priced home 38% higher than in 2021, Ratiu said. Comparatively, rents have only increased 17% from a year ago.

Will American catch a break on housing costs?

Skyrocketing mortgage rates appear to be weakening home-buying demand, especially among first-time buyers. Economists anticipate that will give the housing market more breathing room, causing the pace of home-price growth to slow, in the coming months.

On the rental side, a March report from real-estate website Apartment List showed that rent growth has slowed since last summer — though it’s settled at an above-average pace.

“Even if prices don’t rise as rapidly as they did in 2021, we’re already seeing signs that this year will continue to bring rent growth well in excess of the pre-pandemic trend,” researchers at Apartment List noted.

Other analysts echoed this view. “Market rent increases peaked last September and have slowed notably since then,” Jeffries analysts Aneta Markowska and Thomas Simons noted in a report following the latest CPI release. “We are assuming that housing inflation will moderate to 0.33% monthly pace by the end of the year (which translated to 4.8% annualized inflation).”

But relief isn’t guaranteed. If a growing number of first-time buyers fail to purchase a home in the coming months, they will remain in the rental market. That will create more competition for vacant rental units and push prices higher.

“As we look to the next few months, rising inflation outstripping wage gains and mortgage rates pricing first-time buyers out are expected to maintain rents on an upward trajectory,” Ratiu said.

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