Shiller price index

How housing is fueling searing inflation

Soaring house prices are expected to continue fueling soaring inflation this year, deepening a political crisis for President Biden and create new challenges for the Federal Reserve as it attempts to cool prices without tipping the economy into a recession.

The Labor Department reported last week that the Consumer Price Index, a broad measure of the price of everyday goods, including gas, groceries and rents, rose 9.1 % in June compared to a year ago, accelerating more than expected. It marks the the fastest rate of inflation since December 1981.

In an even more alarming development, housing costs – which account for about a third of the CPI – accelerated again in June, climbing 0.6%, matching an 18-year high reached in May. On an annual basis, housing costs rose 5.6%, the strongest since February 1991. Rental costs also jumped in June, jumping 0.8% in the month, the largest increase monthly since April 1986.

Rising rents are a worrying development, as rising housing costs affect household budgets more directly and harshly. Another data point that measures how much homeowners would pay in equivalent rent if they hadn’t bought their home also jumped 0.7% in June from the previous month.

June housing starts plunge to lowest level in 9 months

Homes in the Harris Ranch community of Boise, Idaho, U.S., Friday, July 1, 2022. The housing market downturn is having ripple effects throughout the industry and mortgage lenders are forecasting a drop in business. (Jeremy Erickson/Bloomberg via Getty Images/Getty Images)

The housing market boomed at the onset of the COVID-19 pandemic, buoyed by historically low interest rates at the same time that American buyers – full of cash and hungry for more space – began to flock to the suburbs. Home prices rose 20% in April from a year ago, according to the most recent data from the S&P CoreLogic Case-Shiller National Home Price Index. By comparison, pre-pandemic levels hovered around 4%.

Economists at the Federal Reserve Bank of San Francisco recently projected that rising housing costs could add up to 1.1 percentage points to the headline CPI in 2022 and 2023.

Experts say housing costs are expected to continue to rise in the coming months, largely due to the way the Labor Department records badly outdated rent data. Mark Fleming, chief economist at First American, told FOX Business that the 5.6% annual increase in housing captured in the June data reading likely reflects inflation from six to 12 months ago, because the leases are generally annual.

Biden Inflation

US President Joe Biden speaks during a visit to a family farm in Kankakee, Illinois, US, Wednesday, May 11, 2022. (Photographer: Taylor Glascock/Bloomberg via Getty Images/Getty Images)

“And as you know, rents have gone up dramatically, house prices have gone up dramatically,” Fleming said. “There’s more adverse pressure on one of the biggest components of inflation – housing – right now. It will eventually turn around because the Fed’s actions kind of cool things down. But it will take a some time to show up.”

Soaring housing prices are likely to create additional headaches for Biden Administration in the future, because unlike food and gas prices – which rise largely as a result of unexpected, but probably temporary, events, such as the Russian war in Ukraine – the root cause of housing inflation is a severe shortage of supply.

Mortgage giant Freddie Mac has estimated that the country is short by around 3.8 million housing units. The crisis has deepened over the years: Up for Growth, a nonprofit advocacy group that focuses on the housing shortage, said in a recent analysis that the deficit nearly doubled from 2012 to 2019. During this period, the crisis worsened in 47 states.

While the Federal Reserve tries to rein in consumer demand by raising interest rates at the fastest pace in three decades, there is little the US central bank can do to increase housing supply.

“[Fed policymakers] are painfully aware that what they do today does not fall proverbially to the bottom of inflation tomorrow,” Fleming said. “That’s why it makes the challenge so difficult, because you really know the impact of your actions. today for some time and there is this risk of overdoing it.”

home loan

A For Sale sign stands in front of a home, Tuesday, Oct. 6, 2020, in Westwood, Massachusetts. Long-term U.S. mortgage rates were little changed this week, flattening in recent weeks after a year-long decline amid economic anxiety in the recession triggered by t ((AP Photo/Steven Senne) / AP Newsroom)

The White House is also limited in its options to address the issue, as building new homes is largely a local issue. There are also reactions from communities struggling against development – ​​a movement dubbed “NIMBY” or “Not In My Backyard” – as well as the general question of finding desirable space and building homes that people Americans are ready to buy.


“We need to have a serious conversation about local zoning ordinances and a broader and deeper national discussion about the ‘not in my backyard’ movement, given the vast demographic shifts that are at hand,” said the RSM chief economist Joe Brusuelas to FOX Business. “We just need to build a lot more affordable homes.