Consumer prices fell in December, yielding a low one-year 2014 inflation rate of only 0.7 percent. However, renters are getting squeezed. Rents increased at the fastest clip since 2008 with a 3.4 percent jump in 2014. Home prices are not part of the consumer price measurement, but something consumers deeply care about, and they look to have risen by around 5 percent.
The overall consumer price index (CPI) fell in December by 0.4 percent. It is the second straight month of decline, thanks to a plunge in gasoline prices. Over a 12-month period to December, CPI increased 0.7 percent, which is the lowest one year inflation rate since 2009. A 21 percent decline in gasoline prices will also filter to areas that require fuel. Already airfare has fallen by 5 percent while delivery service fees are no longer rising as it had in the past.
However, not everything is all right for consumers. In particular, housing costs are rising significantly. Though the rent increase in December moderately slowed to 3.4 percent (compared to 3.5 percent in November), the above 3 percent increases are the strongest rises since 2008. For those fed up with the higher rents and can escape, home prices are rising at an even faster pace of 5 percent. (Home prices are considered an asset, like stock prices, and hence are not counted as part of CPI). Only the historically low mortgage rates are helping in home buying affordability. For homeowners who are on a fixed interest rate, their mortgage payments have increased 0 percent.
Property management companies should be aware that even though they are extracting higher rents from tenants, the cost of operation appears to be rising. The price of water/sewer/trash collection services are rising at a 4.6 percent clip.
The cost-of-living-adjustment on many government benefit checks, like social security that went to effect from January was 1.7 percent. In the meantime workers’ wages have been rising at a 2 percent rate. With CPI inflation at 0.7 percent, it would appear that Americans are experiencing a modest rise in their standard of living – at least statistically. That’s not the case for many renters, including the elderly who are not homeowners. Housing costs – both rents and home prices – are outpacing wages. The fast rising housing costs are happening because there has been a great underproduction of new supply over the recent years. Fewer homes in relation to population growth will make the housing costs more expensive and this trend will likely continue throughout 2015.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.