December 2, 2019
Despite the muted inflation figures of this current economic expansion, most consumers’ largest expense, housing costs have risen faster than all other major categories of expenditures. That is until recently, as home price appreciation has slowed dramatically over the last year, potentially dragging overall inflation down just as core inflation seems to finally be in line with the Fed’s 2 percent target. Should homeowners be worried? No.
The Core Consumer Price Index (excluding food and energy) over the last year is running at the fastest pace of the current economic expansion, but shelter costs account for about one-third of the overall figure. Compare that one-third to goods directly exposed to tariffs, which are less than one-tenth of the overall figure, and you get a sense of why slowing home appreciation may be such a troubling trend. Shelter costs have been rising at over 3 percent for the last four years, accounting for about 60 percent of inflation over that time, and adding more than a full percentage point to headline CPI inflation.
But the slowdown in home price appreciation since early 2018 will eventually drag on core CPI inflation, though hopefully modestly, as sales have firmed recently and income growth has remained decent. In the area serviced by Orion’s brokers, appreciation continues to motor along. After all, we don’t really want house prices to shoot to the moon. Slow and steady wins the race.
Additionally, housing costs as measured by official inflation indices aren’t particularly representative of consumers’ costs, as homeowners with a fixed-rate mortgage or no mortgage do not see a rise in their housing costs consummate with official indices. Remember, housing holds significant sway over inflation and thus central bank policy. But with low vacancies and strong demand amid steady wage growth, housing costs should not derail inflation too far from the Fed’s target. And we continue to remind our brokers to tell their clients that they are helping to provide long-term homes for clients, not a financial instrument like a stock or bond that shoots up or down in price.