Forget Inflation, Apartment Rentals Will Get Worse Before Better

For those without money, which from any reasonable definition of having financial resources is a huge portion of the populace, housing is a big issue. There was a time when standard advice was not to spend more than 25% of your take-home pay for shelter. It’s grown over the years to 30%.

Affording a roof over one’s head costs significant money, whether as part of a family, on your own, or with roommates. (Opt to stay with your parents and the price is likely more psychic than monetary.)

Shelter, taking together rentals and the equivalent rent homeowners would pay, is 32% of the Consumer Price Index (CPI). Food is only 14%. The increase in rents by property owners who have sought it because they could get it has been a significant factor in rising inflation.

(To be fair, many property owners lost significant amounts at the height of the pandemic because rescue funds didn’t necessarily get passed down. Plus, the cost of building and repairs was running 20% year over year in November, making consumer inflation look like a cheap date. Though, according to the site Property Management, more than a third of landlords report holding back part or all of a tenant’s security deposit and a quarter of them apparently admit to doing so unfairly, so maybe forget that idea of being fair.)

However, new research from the U.S. Bureau of Labor Statistics (BLS) and Federal Reserve Bank of Cleveland suggest that the shelter part of CPI lags the true growth of rent expenses by 12 months. In other words, if it seems bad today, wait for a year and it’s bound to become a lot worse.

In the first quarter of 2022, according to the research paper, the rent change as reported by Zillow was 15% annualized. Another measurement called the marginal rent index was up 12%. The rent portion of CPI? Try 5.5%. “If the Zillow reading were to replace the official CPI rent measure, then the 12-month headline May 2022 CPI reading of 8.6 percent would have been over 3 percentage points higher,” the paper noted.

It seems crazy. How could there be such a difference?

As is true with statistical studies in general, many things happen when experts decide how to collect their data samples. The rent portion of CPI is measured by the BLS with a random sample across all of rental housing and offers full representation of rental housing stock. There are good arguments to be made for it, because this is a picture of what is happening across the country.

However, as the researchers note, the BLS-type numbers lag the samples that focus on people who are renting a property without having lived in it before by 12 months. Landlords find it’s harder to force big increases when someone is already in place, and there are financial costs in periods of vacancy in a unit to having tenants move out because a rent increase was too high.

In other words, there’s an effective built-in increase in rents that don’t show up in inflation calculations as they’re typically done. That’s why rents on the whole are likely going to get even worse than they are now.

Given the importance to the entire economy, you might hope that government takes heed and avoids another comparison, this time by Karl Marx: “Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce.”