Across the country, renters looking for new homes are facing staggering double-digit rent increases. But you wouldn’t know from official federal inflation data.
In the past eight months, the rate of change in the annual rental cost for new tenants has more than doubled to the highest level on record, according to Bureau of Labor Statistics data reviewed by The Times. The data, which is not publicly available, paint a very different picture for existing tenants – those who are renewing their leases rather than moving into a new apartment – suggesting that housing costs could continue to rise despite some indicators to the contrary.
And with housing being both the largest contributor to core inflation and a lagging indicator, the recent escalation in rents suggests headline inflation is continuing to rise, even as it shows signs of deceleration in other sectors.
In its latest CPI inflation report, the BLS said annual housing cost inflation was 5.4% in May, the highest since 1991. This figure is a weighted average intended to reflect the rate of inflation affecting new and permanent renters and homeowners concerns like.
But the non-public data behind the top-line number shows a gap between the prevailing conditions affecting those who have relocated and those who have not. Annual rental costs for new tenants increased from 4.3% in July 2021 to 11.1% in March 2022. For existing tenants, inflation was lower and grew at a slower rate over this period, rising from 1.5% to 2.7%. The development was similar for residents of condominiums. (The BLS is expected to release inflation data for June on Wednesday.)
For their survey, BLS visits a specific group of households every six months to track changes in rents. If she finds another tenant, she treats him as a new tenant, but if the tenant stays the same, he is considered a long-term tenant. Since 75% to 80% of renters stay in their homes each year, the topline number is weighted by the inflation rate of long-term renters.
With the spread between new and long-term renters at an all-time high, according to BLS data, this distortion is even more pronounced than usual. That gives new ammunition to critics who have argued that the data released by the BLS does not reflect the severity of housing inflation, particularly in states like California where housing costs are higher.
“In the current economic environment, when housing inflation is soaring, the BLS is underestimating the pace of property price changes,” said Sung Won Sohn, president of Los Angeles-based SS Economics and professor of economics at Loyola Marymount University.
In addition to obscuring the level of inflation new renters are facing, the agency also distorts the reality of the market with the way it calculates the cost of owning a home, according to Sohn. Almost two-thirds of Americans live in their own homes.
Since 1983, the BLS has estimated the rental value of residential properties by measuring the rents paid by tenants in the same area. This is then converted into a rental equivalent.
“For me, the condominium rent in the official data is more of a wild estimate,” said Sohn. “If I rented my own house to myself now that the price hike is very high, I would pay a lot more than an apartment rental, but the BLS wouldn’t necessarily reflect that.”
In an interview, BLS economist Steve Reed defended the bureau’s methodology but acknowledged that the home inflation measure, which is made available to the public as part of the closely watched consumer price index, does not capture the full picture.
“The CPI reflects the rental unit universe fairly well, while other metrics only look at new tenants, which is a small subset of all rent payers,” Reed said. Internally, BLS has been tracking the different inflation rates for new and existing tenants since December 2017.
“There’s a kind of hypothesis that rent rate changes are more likely to apply to new tenants, and we wanted to identify that in our sample to see if it’s true,” he said. “The results confirm what we suspected.”
Reed also said BLS “remains comfortable with the general idea of a rental equivalent” to track home inflation. But he said the agency is exploring new ways to capture the “out-of-pocket” costs of home ownership, such as maintenance. “We are doing some research to develop alternative measures for different subgroups of the population and in some of these cases we think rent equivalence might be less appropriate,” he said.
Lease renewals have hit record levels lately as tenants have put off looking for a home in an increasingly volatile rental market, said Jay Parsons, chief economist at RealPage, a firm that tracks rent changes.
“This data is evidence that after a long period of slower price growth, rents for new tenants are increasing very rapidly, faster than before,” said David Wessel, director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.
Past trends suggest it’s only a matter of time before higher inflation translates into renewals, he said.
https://www.latimes.com/business/story/2022-07-11/inflation-housing-costs-california-bls-consumer-prices Housing inflation is worse than official BLS data show