Housing costs have been a major driver of inflation during the pandemic, putting pressure on Americans’ budgets.
However, new data suggests that some relief may be on the horizon.
U.S. Federal Reserve officials say housing inflation should cool over in the coming months.
This would aid the Fed’s efforts to control overall price increases and potentially pave the way for interest rate cuts.
However, the reprieve could be fleeting.
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- Housing inflation should cool in the coming months, providing temporary relief to Americans.
- However, a shortage of new housing threatens higher shelter costs again after 2025.
- Rent inflation has slowed, but home prices remain elevated, signaling enduring inflation risk.
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Will Housing Inflation Relief for Americans Be Short-Lived?
Experts warn that a shortage of new housing units could lead to future price spikes.
Shelter accounts for around one-third of the Consumer Price Index, so housing inflation is pivotal to the Fed’s 2% overall inflation target.
During the pandemic, median home prices jumped 50%, while apartment construction favored higher-end units.
This intensified housing affordability issues.
Now the Fed aims to curb demand without choking off the supply of new homes and apartments, which is a difficult balance to strike.
Soon, a “disinflation” in shelter costs seems likely as pandemic-era rent and price hikes moderate.
However, constrained housing inventory could risk faster shelter inflation again after 2025.
The U.S. needs around 100,000 new apartments monthly to meet demand, but production is set to plunge below 60,000.
Rent measures hint at cooling.
The Zillow rent index rose 3.4% year-over-year in January 2024 versus nearly 16% in early 2022.
However, enduring short supply may entrench inflationary pressure over the long run.
The median home price remains elevated at $417,000 after peaking at $479,000 in late 2022.
Shelter inflation hit an 8.32% annual rate in March 2023, the fastest since the early 1980s.
While the peak has passed, progress in lowering shelter inflation has been “bumpy.”
The category is declining slower than the Fed expected.
Housing markets vary and are shaped by local factors.
However, the Fed’s rates influence investment in new construction.
Future supply constraints risk faster shelter inflation after 2025 if home building lags demand.
The temporary break Americans may get from sky-high housing costs could be the calm before the storm.
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