Federal Reserve Chair Jerome Powell on Friday said that the central bank is aware that rent growth is slowing down across the nation, but that it will take some time before that is reflected in the Fed’s inflation gauge.
Powell, in a speech kicking off the Fed’s annual retreat in Jackson Hole, Wyo., noted that rent rises — a major contributor to overall inflation — have been slowing, but the gauge the Fed uses to measure price changes has only begun to reflect that cooling off.
“In the highly interest-sensitive housing sector, the effects of monetary policy became apparent soon after liftoff. Mortgage rates doubled over the course of 2022, causing housing starts and sales to fall and house-price growth to plummet,” Powell said. After the Fed raised interest rates last year, mortgage rates doubled. The 30-year mortgage rate is now at the highest level since 2001.
“Growth in market rents soon peaked and then steadily declined,” Powell said. The slowdown in rents occurred due to higher interest rates, but also due to the “softening in real household income growth over the past couple of years,” he stated.
In July, the yearly rate of inflation rose to 3.2% from 3% in the prior month. More than 90% of the increase in prices was due to rising housing costs. The Fed wants to get inflation to a yearly rate of 2%, and Powell is prepared to raise interest rates further to get to that target.
But he acknowledged that the way the Fed measures housing inflation has lagged private data sources.
Rents fell 0.7% in July as compared with last year, according to Apartment List. Rents fell that month for the first time since the early pandemic, the company said. July is the latest month for which data is available. In July 2022, rent rises were running at 12%, according to RealPage Market Analytics.
Rent rises have slowed significantly over the past few months, as more apartments and single-family homes increase the supply of homes available. Seasonal trends also suggest that rent rises will slow even further in the months ahead, Apartment List said.
The way the Fed measures housing inflation includes rents paid by all tenants, as well as equivalent rents that could be earned from homes occupied by the owner. But even the Fed’s housing cost indicators have begun to show a slowdown, Powell said.
“Because leases turn over slowly, it takes time for a decline in market rent growth to work its way into the overall inflation measure,” Powell explained. “The market rent slowdown has only recently begun to show through to that measure.” And the slowdown in rent growth for new leases over the last year will affect housing inflation over the coming year, he said.
The bottom line is that the Fed is aware that rent growth has slowed but is waiting to see that trend reflected in the data.
“Going forward, if market rent growth settles near prepandemic levels, housing-services inflation should decline toward its prepandemic level as well,” Powell said. “We will continue to watch the market rent data closely for a signal of the upside and downside risks to housing-services inflation.”
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