In 2009, the Pixar Animation Studios computer-animated film Up was released by Walt Disney Pictures. The film’s main character is Carl, voiced by Ed Asner. He is an elderly widower who travels to South America in order to fulfill a promise that he made to his late wife Ellie. Carl, who was a balloon salesman during his working years, manages to turn his house into a makeshift airship using helium balloons to fly to Paradise Falls.
Just as Carl managed to take his home Up, young families today are finding that housing costs continue to go up, whether they are renting or buying. Many Americans perceive that housing costs have been going up faster than their incomes have. You can see that this is true from our first chart from Axios. Since calendar year 2000, incomes have risen by approximately 76%. However, rental costs have grown by more than 134%. We know that when people spend more of their income on things like housing, groceries, and education, they have less money to save for the future or spend elsewhere. This harms future economic growth, as nearly 2/3 of GDP is driven by consumer spending.
Based on how the Bureau of Labor Statistics (BLS) calculates inflation, housing costs make up approximately 1/3 of CPI each month. As we have shared with you previously, the government uses something known as owners’ equivalent rent to help measure the growth of housing costs. According to the BLS, “the shelter service that a housing unit provides to its occupants is the relevant consumption item for the CPI. For an owner-occupied unit, most of the cost of shelter is the implicit rent that owner-occupants would have to pay if they were renting their homes”. Unbelievably, this number is largely derived from random phone calls to a sample of homeowners asking them how much they think their house would rent for?
In today's world of high-frequency data, we know how many people drove on the turnpike, went to a restaurant, or checked in at the airport almost instantaneously. It seems extremely dated to use random phone calls and guesses to determine such a large component of the inflation calculation. From history, we know that this number lags current data, both going up and going down. We can see this in our second chart which shows current rents versus the CPI calculation for shelter.
You will note that rental costs started skyrocketing in 2021. This was as the economy reopened from the COVID-19 pandemic and people were flush with cash from stimulus payments and enhanced unemployment benefits. At the same time, the government-reported shelter costs were still dropping. Now that rent increases are moderating significantly, those same government-reported statistics are still rising. This may cause inflation to be reported as higher than it actually is for the next several quarters. It is also important to remember that even though rent inflation is moderating, it does not mean that rents have gone down. They are simply not rising as quickly as they were before.
Additionally, we also have not seen housing prices drop for those families wishing to buy instead of rent. This is largely due to two factors. The first is that mortgage interest rates have gone from below 3% to nearly 7%. People who have locked in lower mortgage rates over the last decade are less likely to sell their homes and take on a new mortgage at a much higher interest rate. This is keeping a significant amount of housing inventory off the market.
This stands in stark contrast to what we saw during the subprime mortgage crisis in 2007. As you can see from our chart below, at that time we had approximately 4 million homes on the market. This was substantially higher than historical averages. Therefore, when the economy went into recession, there was more supply available than there was demand. This led to housing prices dropping significantly over the next several years.
As you can see from the chart above, there are only 980,000 homes for sale recently, and 417,000 of those homes are under contract to be sold. This means that there are only 563,000 homes available that people wanting to buy are competing for. This is why we are still hearing of bidding wars for desirable homes. It is also why we have not seen a meaningful drop in housing prices despite higher mortgage rates.
Up may have been a highly successful family film from 2009. Unfortunately, whether you are looking to rent or buy, up is also the direction of the housing market. If you or your loved ones are looking at housing options and have questions about what all of this means for you and your family’s finances, please do not hesitate to reach out to the CFPs at Impel Wealth Management. We are here to answer your questions and provide advice and counsel when needed. It is our mission and what drives us to help you “Move Life Forward”.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.