Tuesday, May 3, 2011

Rent Inflation

Tenant and owners’ equivalent rents account for 39.9% of the core CPI and 17.1% of the core PCED. (Tenant rent accounts for 7.7% and 3.9% of the core CPI and core PCED. Owners’ equivalent rent accounts for 32.2% and 13.1% of the core CPI and core PCED.) The risk is that tenant rent could rise rapidly as more Americans decide to rent rather than buy their homes. That could also boost OER, since it is based on actual rents.

The problem stems from a mismatch of supply and demand of affordable rental housing in the wake of the housing crash. The foreclosure crisis has sparked a substantial increase in the number of former owners who now need to rent just at a time when development of new affordable housing units has stalled. Many potential homebuyers may postpone purchasing a house because prices are still falling. They are more likely to rent. The population of seniors is starting to increase at a faster pace as the Baby Boomers age. Seniors tend to rent rather than to own their homes when they retire as they need less space and move from houses to apartments.

On the other hand, many Americans are likely to postpone retiring. More importantly, tenant rent inflation is highly correlated with wage inflation, which is likely to remain subdued. The index of average hourly earnings was up only 1.9% y/y during April. That’s the lowest since March 2004. Tenant rent and OER are up 1.2% and 0.8% y/y through March. That’s not much. (We update these charts for subscribers to our service in our Rent Inflation Economics Alert.)

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