The Unassuming Economist

From a speech by Fed Governor Christopher J. Waller:

On rents:

“However, more recently rents have accelerated sharply. On net, rents have risen 6.5 percent since January 2020, according to the prices tracked under the Consumer Price Index (CPI). That is not out of line with the pace of rent increases seen in the CPI over the previous five years. But there is good reason to think this number doesn’t fully reflect the extent to which rents have grown. CPI measures rents that people are currently paying, under leases that can be slow to reflect market conditions. Meanwhile, measures of market rent have increased a lot more than 6.5 percent over the last two years. For example, CoreLogic’s single family rent index rose 12 percent over the 12 months through December, and RealPage’s measure of asking rent for units in multifamily buildings rose 15 percent over the 12 months through February. Based on various measures of asking rents, some recent research suggests that the rate of rent inflation in the CPI will double in 2022. If so, rent as a component of inflation will accelerate, which has implications for monetary policy.

Rent is a significant share of monthly expenses for many households, but lower income households spend a larger fraction of their budget on housing, so rising rents hit these households harder. In 2019, those in the lowest quintile of household income dedicated 41 percent of their spending to housing, while those in the top quintile spent only 28 percent. One piece of better news for low-income renters is that rent increases have not been larger in the neighborhoods where they tend to live. Specifically, data from RealPage suggest that asking rents rose 16 percent in both low- and moderate-income neighborhoods from January 2020 to February 2022, the same as in higher income neighborhoods.”

On affordability of purchasing a home:

“House prices are up a cumulative 35 percent since the beginning of the pandemic, according to the Zillow Home Value Index. That rate of increase is much faster than the previous five years and even faster than during the housing boom of the mid-2000s. Looking over the past two years, one would think the large increase in home prices would have made it more difficult for renters to become first-time buyers. Surprisingly, we have not seen evidence of that yet. The fraction of renters aged 20 to 45 who transitioned into home ownership last year was the highest since the Great Recession. It could be that time spent at home during the pandemic made renters more interested in owning a home, or that people are getting help from family or friends with down payments, or that some people are choosing to buy smaller homes than they would have a few years ago when prices were lower. Whatever the causes, the increase in first time buyers is clear.

Home buying during the pandemic has been strong among minority families as well. In 2020, 7.3 percent of home purchase loans for owner-occupied properties were taken out by Black families, the highest level since 2007 and well above the low of 4.8 percent in 2013. Still, the gap in homeownership rates between minority and white families remains very wide. Moreover, according to Census Bureau data, homeownership rates for Black and Hispanic families appear to have edged down during 2021. These trends may reflect that the negative economic effects of the pandemic were felt disproportionately by minority households. Indeed, research shows that minority homeowners were much more likely to miss mortgage payments and enter mortgage forbearance than white homeowners. While federal and private sector forbearance programs helped many households keep their homes, families experiencing more permanent or severe income losses may have had to sell their homes and exit homeownership.”

On housing demand:

“Demand for housing space has been especially strong during the pandemic. Lockdowns as well as remote work and school may have spurred people to seek homes with more space, leading to an increase in demand for larger and otherwise better homes.⁵ In fact, the average size of new single-family homes increased in 2021, reversing a downward trend from 2015 through 2020. Retail sales at building supply stores surged during the pandemic, as homeowners added space or made other improvements that could increase the quality of their homes. In January, this spending was 42 percent higher than the average for 2019, and even after adjustment for the sharp increase in the price of building materials, it was still up 19 percent. One indication of people trading up for housing is evident by comparing Zillow’s Home Value Indexes by housing type. The index for single-family homes has increased more than that for condominiums since January 2020. In addition, purchases of second homes have increased. Second homes averaged about 3-1/2 percent of home purchase loan originations from 2014 to 2019 but about 5 percent of originations in 2021. The 2021 share was in line with the peak seen during the last housing boom.

Meanwhile, changes in household formation may have been contributing to increases in housing demand over the past year or so. While many households increased in size during the early months of the pandemic, as young people returned to their parents’ homes, this change appears to have largely reversed by the end of 2021. The fraction of adults aged 18 to 30 who are the heads of their own households is now back near its 2017-2019 average. The surge in the number of households has pushed down housing vacancy rates from already-low levels. Rental and homeowner vacancy rates fell considerably during the pandemic, reaching lows in the fourth quarter of last year that haven’t been seen since the 1980s.

The pandemic-related changes in demand for housing, rented and owned, coincided with a longer-run increase in demand to live in certain parts of the country. For the past several decades, demand for living in cities with high-paying jobs and many urban amenities has surged, pushing up housing costs in these areas. Among metro areas in the top quartile of local housing demand, population increased 80 percent, and single-family home prices rose more than 110 percent from 1990 to 2019 after adjusting for inflation.⁶ For the nation as a whole, population only increased 32 percent and house prices rose 59 percent.”

On housing supply:

“The supply side has been pushing in the same direction—towards tighter housing markets and more expensive shelter. U.S. housing supply has probably been more constrained lately than at any time since the end of World War II. One estimate is that the current growth in the supply of new housing units is about 100,000 less per year that would be needed to support trend increases in demand from household formation and replacement of depreciating units.⁷ Supply adjusts to changes in the economy more slowly than demand because of the time it takes to plan and build. With workers at home and supply bottlenecks, there were pandemic-related drops in the production and importation of many construction materials. These supply shortages contributed to skyrocketing input prices. In January 2022, lumber prices included in the Producer Price Index were 92 percent higher than the 2019 average. Even with increased materials costs, suppliers have been unable to keep up with demand. The volume of lumber now being sold is more than 150 percent higher than last August and is similarly larger than the average volume over the previous ten years.

Labor is also a key input in home construction. The supply of construction labor, like other sectors, has been held down by pandemic-specific issues like early retirement. One measure of labor market tightness for the construction industry increased steadily from 2010 to 2019 and then in 2021 was more than double the level recorded during the construction boom of the mid-2000s.

Local land use regulations have also played a role in constraining housing supply over the past several decades. Probably not by accident, these regulations have tended to be more restrictive in areas with high housing demand. There has been a growing public debate about these restrictions on local home building, not just at the local level, but among governors and state legislatures. While some local regulations have been changed to allow more housing construction in high demand areas, the effects will take time, and it remains to be seen whether the increases in supply created by these regulatory changes will be enough to satisfy local demand.”