Regional Fed: Housing inflation down, but still above pre-pandemic levels

(The Center Square) – Housing inflation has declined since its peak in 2023, but remains elevated since 2019, according to new research by the Federal Reserve Bank of Kansas City.

The bank’s “Economic Bulletin” released on Monday details the inflation rate for housing services, which draws from Bureau of Economic Analysis data on tenant-occupied unit rent and owner-occupied unit rent.

Housing services inflation was 5.5% in April, the most recent data available, down from 9% in 2023, but still almost two percentage points higher than in 2019, according to the KC Fed.

The bulletin also included Zillow’s measure of rent inflation, which is based on “asking rents.” Zillow’s measure peaked in late 2021 and declined to pre-pandemic levels by early 2023.

“One key reason the Zillow measure is thought to lead the official measure is because it is based on asking rents for prospective rather than current tenants,” Jordan Rappaport, a senior economist with the bank, wrote in the bulletin. “By contrast, the official measure reflects rents set by existing tenants’ leases, which may have been signed many months previously or renewed at a lower rate than a new tenant would face.”

According to Rappaport, “Multiple sectoral factors are likely slowing the decline in housing services inflation. One is that home construction never fully recovered from the Great Recession, meaning the supply of housing was already low going into the pandemic.”

In 2019, single-family home construction was still 25% below levels in 1998, the bulletin noted.

While construction levels have “surged” since the pandemic, “even vigorous construction can only slowly increase the nation’s housing stock,” Rappaport wrote.

Mortgage interest rate “lock-ins” following the increase in rates in 2022 is also “significantly depressing the number of homes for sale.”

“Among borrowers with a government-guaranteed mortgage, 69% would face a more than 3 percentage point increase in their mortgage rate if they were to purchase a different home today, while 83% would face an increase of more than 2 percentage points,” Rappaport said.

According to the bank, monthly mortgage payments have increased 85% for prospective homebuyers since the pandemic began.

“The high monthly payments have displaced many potential first-time home buyers into the rental market, representing another reason home services inflation is likely to decline only gradually,” the bulletin said.

The KC Fed covers the 10th District, which includes Kansas, Colorado, Nebraska, Oklahoma and Wyoming, and parts of New Mexico and Missouri.