The Rent is Too Damn High

Economy Inflation
The Rent is Too Damn High

Inflation is back on the rise again, and high rental prices are one of the main causes. Shelter comprises one of the biggest chunks of the Consumer Price Index (CPI), the measure the government uses to track inflation. According to the Bureau of Labor Statistics, gasoline and shelter “contributed over half of the monthly increase in the index for all items” in April.

Rental pricing data from Research provided to Splinter backs this up, and it reveals a white-hot market with skyrocketing rents across the entire country. The data begins in February of 2019, and to March of 2024, the average rent in the United States has risen a little over twenty-five percent since then, with most metro areas in the northeast and the west outpacing the national average.

The average monthly rent in the United States over this period is $1,999 and the median is $1,987. The average rent in cities like Boston ($3,565), Los Angeles ($3,375), New York-Newark ($3,555) and San Fransico ($3,643) across the last five years far exceeds the national average. Even cities like Birmingham, Alabama which have comparatively low rents (an average of $1,404) have seen rents skyrocket, up a staggering forty-one percent from 2019.

There are only two cities in Rent’s data where rents have fallen since 2019. Houston prices have shrunk a little less than five percent with an average of $1,673, and San Francisco is actually down a little less than four percent over the last five years.

However, if you measure San Francisco rents from February of 2021, just over a year before the Fed began their rate hike regime, they are up twenty-three percent. San Jose has a similar dynamic where their extremely high rental prices (an average of $3,597 over the last five years) are only up a little less than two percent, but measured from February 2021 they are up thirty percent. This definitely reveals some sort of tech-specific California cause as not every city has seen rents rise faster from 2021 than they did from 2019, but a city like San Antonio mirroring this dynamic with their average rent up less than one percent since 2019 and up twenty-one percent from 2021 indicates that this is a clue as to one of the central problems here.

The Fed let the economy run way too hot and inefficiently in 2021, aiding the inflationary forces COVID unleashed, then they helped drag up rental prices from their inflated peak of 2021 with higher interest rates beginning in 2022.

The rent is simply too damn high, and Fed Chair Jerome Powell and the Federal Reserve are exacerbating an already tenuous situation. Calling high rental prices “inflation” is a bit of a misnomer given that the root cause is not enough housing supply built in our major cities. Higher prices are just the natural result of high demand and low supply. It’s not inflation, it’s policy, and the Fed policy of higher interest rates are helping to keep rental prices high.

It may sound a little strange if all you knew about this was what Jerome Powell said in his press conferences which are echoed by practically everyone in business media, but there is a lefty economic line of thinking that has a lot of logic to it and is supported by the sticky CPI shelter data. The Fed has said time and time again that they view high interest rates as one of their primary weapons to bring down inflation, but high interest rates make it more expensive to buy any kind of housing, and those high rates are making shelter more expensive and driving inflation up, not down.

Stephanie Kelton, famed Modern Monetary Theory economist, has been beating this drum for a while, but she is now seeing support for this case from people like Jack Manley, JPMorgan’s Asset Management Executive Director.

John Stoltzfus, Oppenheimer Asset Management’s Chief Investment Strategist, concurs that higher interest rates are actually inflationary for housing, and he asserted that if the Fed lowered interest rates, housing supply would rise, and prices would fall. The entire story we have been sold since the hot November 2021 inflation print that changed the world is that higher interest rates are the key to lowering inflation.

Higher interest rates do help to lower inflation in that they sap demand and make borrowing more expensive and can cool down the economy, but for interest rate-sensitive industries like housing, that dynamic does not hold true. Higher rates mean more expensive mortgages and thus, housing prices and rent, which means higher CPI shelter inflation.

Josh Brown, CEO of Ritholtz Wealth, even squashed the notion that higher interest rates lower wealthy people’s desire to invest and spend, pointing out the obvious: if you can get five percent returns risk-free on millions of dollars, you’re in heaven. The wealth effect this free money creates as a direct result of high interest rates can actually be stimulative.

Jerome Powell and the Federal Reserve made a calamitous policy error keeping monetary policy extremely loose and interest rates low while inflation was on the rise in 2021. They had to hike rates at one of the fastest paces in history to catch up with how far behind the inflationary curve they found themselves, and that completely warped interest rate sensitive industries like housing and insurance. The dynamic in places like San Francisco where rents are slightly down over five years but way up since the Fed started hiking rates demonstrates this causal relationship between high rates and high rents. There is also a direct link between out-of-control rental prices and America’s record-high homeless population. The Fed owns part of this homelessness crisis.

It makes complete and total sense that rents would rise in tandem with rate hikes, as landlords raise prices to try to turn a profit that the Fed is cutting into. With shelter being one of the most stubborn aspects of CPI, the Fed should start looking to cut interest rates, but the conventional thinking at the Fed so far has been that as long as inflation stays high, so will interest rates. Maybe the famed Jimmy MacMillan should be our next Fed chairman, as back in 2011 he understood something that Jerome Powell and his army of wonks at the Federal Reserve still seem to struggle to wrap their heads around: the rent is too damn high.

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