Homes under construction in Englewood Cliffs, New Jersey on November 19, 2024.
Adam Jeffery | CNBC
If President-elect Donald Trump is to push inflation to more tolerable levels, he will need help with housing costs, an area where federal policymakers have limited influence.
November’s consumer price index report contained mixed news on housing, which accounts for a third of the closely watched inflation index.
On the one hand, the category posted its smallest full-year gain since February 2022.
But on the other hand, the annual growth rate is still 4.7%, excluding the COVID-19 period. This level was last seen in mid-1991, when CPI inflation was about 5%. According to the Bureau of Labor Statistics, housing contributes about 40% to the monthly increase in the price index, which is higher than the cost of food.
With the Consumer Price Index currently inching up to an annual rate of 2.7% (3.3% when excluding food and energy), it is unclear whether inflation will return sustainably and convincingly to the Fed’s 2% target, at least for the time being. Not until housing inflation eases further.
“As time goes on, we expect rent growth to begin to slow on a year-over-year basis,” said Lisa Sturtevant, chief economist at Bright MLS, a Maryland-based public service covering six states and Washington, D.C. It just feels like it takes a long time, though.
Still rising, but not as fast
In fact, housing inflation has been moving lower slowly and unevenly since peaking in March 2023.
The housing problem is caused by a persistent cycle of supply exceeding demand, which began in the early days of the COVID-19 pandemic and has yet to be resolved. housing supply Home prices in November were about 17% below levels five years ago, according to Realtor.com.
Rent has been a particular focus for policymakers, and the news about it has been mixed.
The national average rent was $2,009 per month in October, down slightly from September but still 3.3% higher than a year ago, according to real estate market website Zillow. National rents have increased by about 30% in the past four years.
When it comes to housing, costs also continue to rise, exacerbated by high interest rates that the Fed is trying to lower.
Although the central bank has cut its benchmark borrowing rate by three-quarters of a percentage point since September and is expected to cut another quarter of a percentage point next week, the typical 30-year mortgage rate has actually climbed to about the same level as the Fed Interest rates were cut by the same amount.
All of these factors pose potential threats to Trump, and some economists expect that other Trump policies, such as tax cuts and tariffs, will exacerbate inflation woes.
“We know that some of the initiatives that the president-elect has proposed are quite inflationary, so I think the prospects for continued progress toward the 2% target are less certain than they were six months ago,” Stewart said. “I don’t think “I’m compelled by anything that specifically shows that the federal government can meaningfully address supply issues, certainly not in the short term.”
Currently optimistic
During his presidential campaign, Trump made deregulation a cornerstone of his economic platform, which could spread to the housing market by opening up federal construction lands and generally lowering barriers for homebuilders. Trump has also been a strong proponent of lowering interest rates, even though monetary policy is largely outside his purview.
The Trump transition team did not respond to a request for comment.
Wall Street is generally optimistic about the real estate situation.
“Rents may eventually normalize to levels consistent with 2% inflation,” Bank of America economist Stephen Junod said in a note. Economist Krushna Guha, head of central bank strategy at Evercore ISI, wrote in November Housing data “will be viewed as encouraging by the Fed.”
Still, housing costs “remain the No. 1 source of price increases, and the slowdown in increases is not comforting,” said Robert Frick, corporate economist at Navy Federal Credit Union.
That could spell trouble for Trump, who faces a potential “Catch-22” that would make alleviating housing burdens difficult to solve.
“We’re not going to lower housing costs until housing costs come down. But we’re not going to lower housing costs until housing costs come down,” Sturtevant said. “We know there are some unknowns that we may not have talked about two or three months ago.”
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