Costly US housing will make the job of taming inflation even harder

THERE are plenty of reasons US housing will remain costly, which in turn will contribute to inflation, complicating the US Federal Reserve's policy path.

The basic supply-and-demand dynamic - with the former squeezed and the latter still strong - means that consumers will need to pay up for a place to live.

A tight labour market and rising wages also support home prices.

Solid financing, stricter regulation, and "massively deleveraged" consumers with equity-rich properties make the case for strategist Jared Dillian, who has outlined why there won't be another crisis in residential real estate.

New York City trends are also telling (though certainly reflective of just a tiny slice of the US housing market).

There was a summer slowdown in Manhattan, with contracts signed sinking around 40 per cent versus last year, according to data from real estate firm Serhant.

Even so, homes are selling at the quickest pace since 2017 - and the median price actually rose 1 per cent, to about US$1.16 million.

Serhant says it has yet to see any major correction in prices due to fewer sales, rising mortgage rates or economic instability. Brooklyn homes sold at the fastest pace since 2015.

Here's another indicator: Google home searches usually moderate during the summer, with potential buyers on vacation, according to UBS's John Lovallo.

But not this year. Search interest for existing homes rose 1.6 per cent and jumped 22 per cent for new homes from the end of May through August versus the average of the same time period over the prior 8 years, Lovallo writes.

That's in keeping with homebuilder commentary, like luxury builder Toll Brothers saying that demand rose in August. Rent has also exploded, hitting a fresh record last month.

Meantime, housing is a key driver of services inflation. Rent and owners' equivalent rent (OER) inflation are expected to increase further, according to the Federal Reserve Bank of Dallas, which noted housing contributed 1.4 percentage points (or 32 per cent) to core personal consumption expenditures (PCE) services inflation in July.

While the housing market has shown signs of cooling, the Dallas Fed sees reason to believe rent and OER inflation will continue to climb. An analysis by the bank suggests rent and OER will keep adding to inflation in months ahead before easing in mid-2023. BLOOMBERG.


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