The United States is experiencing a cooling inflation trend, with the stock market flourishing, wages steadily rising, and plenty of job opportunities, painting a picture of a thriving economy. However, most Americans do not believe it’s time to pop open the champagne.
According to a report by CNN on June 13th, while public opinion surveys show that people generally “feel good” about their personal financial situation, the disconnect between positive economic data and individual or household financial constraints is apparent. Despite many positive signals in the overall economy, Americans feel that the economic situation is not as rosy as the surface data suggests. One undeniable reason for this is that rental and housing prices remain generally high.
Last month, the consumer price index rose by 3.3% (year-on-year), meaning that the prices of everyday goods and services were on average about 3.3% higher than a year ago. Some major retailers have begun to lower prices on certain goods after realizing that customers have had enough of their pricing strategies.
Looking at the “super core” consumer price index (CPI) – unofficial data that excludes food, fuel, and housing costs – the economic outlook appears more optimistic. The super core CPI has only risen by 1.9% compared to a year ago, which is considered an ideal level by almost all central banks worldwide. Unfortunately, the reality of daily life includes facing costs for food, gas, and housing.
In May of this year, housing costs – including rent and estimated purchasing costs – rose by 5.4% compared to a year ago, showing a slight improvement from April and significantly lower than the peak of 8.2% in March last year. Before the pandemic, housing inflation rates typically rose by around 3.5% annually.
“It’s like an 18-wheeler truck braking downhill. We know home prices will go down, but the descent is slow,” said Jay Parsons, an economist and investment strategy director at Madera Residential, a Texas-based apartment developer.
The CPI does not measure housing costs, and the current high cost of homeownership is a nightmare for some.
Federal Reserve Chairman Powell stated on Wednesday in his usual understated manner, “The housing situation is complex. Ultimately, the best thing we can do for the real estate market is to lower the rate of house price inflation, so we can lower interest rates and allow the real estate market to continue to develop normally.”
However, the housing market woes persist: low housing inventory, mortgage rates hovering around 7% for months, and house prices continue to rise to historic highs. These factors have converged into a dilemma where few can afford the costs of moving, and even fewer can directly afford to buy a house.
On the other hand, being able to afford a house does not equate to being able to sustain it. According to a recent study by Bankrate, the average U.S. homeowner now spends an additional $18,100 annually on housing-related expenses outside of mortgage payments. These costs include property taxes, insurance, maintenance, energy, and various other expenses. This is a 26% increase from four years ago when the average annual cost of maintaining a home was $14,400.
There are some early signs indicating that the real estate market is beginning to soften. A recent Zillow market report found that sellers are returning to the market, but they are finding that buyers have lost some of their purchasing enthusiasm.
Home sales in May dropped by 6% compared to last year. The report indicates that this helps partially replenish housing inventory, with a 22% increase in the number of homes on the market compared to almost record lows of last year. Inventory remains 34% lower than before the pandemic, but this is the smallest gap in over three years.
“Homeowners who have postponed listing their homes for sale may have become impatient,” said Orphe Divounguy, Zillow’s senior economist. Meanwhile, the double impact of inflation and high interest rates has hindered first-time homebuyers and reduced competition in the housing market.
“If this trend continues, we are likely to see price growth stabilize or decline next year,” Divounguy also stated. Of course, as Powell pointed out in his speech on Wednesday, it may take “several years” for housing inflation to normalize.