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Housing Costs Are Cooling. Where the Market Is Headed.

Housing inflation has remained hot in recent months—but it could be approaching a turning point, according to a Zillow economist. 

Housing costs—both the cost of buying or renting—climbed earlier in the pandemic. While data show that prices in both categories have cooled in recent months, the industry’s contribution to inflation has remained hot. 

The Consumer Price Index’s measure of shelter costs, a category containing indicators of rent, has remained a major contributor to monthly inflation readings. In February, the most recent month for which data for this closely watched gauge is available, shelter costs gained 8.1% from the previous year—the greatest such increase since 1982, according to historic Bureau of Labor Statistics data.

The gain accounted for more than 70% of the all-items increase that month, the BLS said in a release. Similarly, rent of primary residence, a subcategory specifically measuring the cost of leasing a home, was 8.8% higher than the year prior, the largest such gain since 1981.

That’s despite private indicators of rent showing a continuing slowdown in the cost of leasing an apartment that began in the first half of 2022. Zillow’s measure of typical asking rents in February logged a year-over-year gain of about 6.3%—significantly lower than their roughly 17% year-over-year growth one year prior. The divergence is due to the way rental costs are measured by the inflation index: CPI measures price changes in all leases, while private data, such as Zillow’s Observed Rent Index, or ZORI, measures only asking rents on new leases. 

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Zillow data released last week shows that the year-over-year deceleration in asking rents continued into March: the company’s measure of U.S. rents gained roughly 6% year-over-year, slower than February’s roughly 6.3% increase. It was the slowest such gain since May 2021, according to March data provided by Zillow.

That inflation data lags behind asking rents isn’t a new concept. In the Federal Reserve’s first meeting of the year, “participants judged that housing services inflation would likely begin to fall later this year, reflecting continued smaller increases, or potentially declines, in rents on new leases,” according to the meeting’s minutes.

That turning point could be around the corner, says a Zillow economist. “Previous research suggests a 12-month lag between annual ZORI growth and annual CPI Rent growth, giving cause for hope that the year-over-year growth in the latter could begin to decelerate sometime soon,” wrote Zillow senior economist Jeff Tucker in an April 5 report

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Whether March’s CPI shows deceleration in rental costs has yet to be seen. The data is due to be released on April 12. Investors may have to wait longer to see rent inflation begin to slow, according to Zillow’s Tucker: “June looks like the most likely candidate when year-over-year CPI rent growth might decelerate, since monthly growth in that measure accelerated sharply last June, which will make the baseline comparison easier to fall below this summer.”

Renters this year should expect “a very normal year,” Tucker said in an interview with Barron’s—”which feels like a big shift after three very abnormal years in the rental market.” Tucker said he expects typical rental market seasonality, which sees rents grow the most in the spring and early summer and cool in the fall and winter. Additional supply hitting the market from completed multifamily homes “is a good reason not to expect that rent growth pendulum to swing back toward runaway rent growth,” Tucker said.

The housing market intersects with CPI data in more ways than just one: the monthly data release has in the past been a driver of mortgage rate changes as investors use the data to gauge the likelihood of future Federal Reserve monetary tightening. 

The average 30-year fixed-rate mortgage measured by

Freddie Mac

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has dropped in recent weeks as bank sector uncertainty helped drive down the 10-year Treasury yield, with which mortgage rates often move. From the first reading in March to the first reading in April, the average rate fell by nearly 0.4 percentage point, to a recent 6.28%. 

Following Friday’s jobs report that sent the 10-year Treasury yield higher, the coming CPI release is the next test for mortgage rates. The Mortgage Bankers Association “expects that the Federal Reserve has reached the peak for this rate cycle,” Mike Fratantoni, the trade group’s chief economist, said in a Friday release—but added that coming inflation data will be critical. ”If inflation does not show signs of also slowing, the Fed may move ahead with one last rate hike,” Fratantoni wrote.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

Read More:Housing Costs Are Cooling. Where the Market Is Headed.