Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

CPI Shows Rents Are Rising, Zillow Forecasting Drop In 2023; Professor Says Fed's Powell Will 'See The Light'

Published 07/11/2022, 17:13
Updated 07/11/2022, 18:41
© Reuters.  CPI Shows Rents Are Rising, Zillow Forecasting Drop In 2023; Professor Says Fed's Powell Will 'See The Light'
Z
-

While consumer price index data in 2022 has been showing rent prices accelerating, Zillow Group Inc. (NASDAQ: Z) is reporting that a decline in rent inflation for 2023 can already be forecasted.

In the last Fed meeting ending on Nov. 2, chairman of the Federal Reserve Jerome Powell said, “It is very premature to be thinking about pausing. People when they hear ‘lags’ think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go.”

What Happened: As the Fed’s two main inflation indicators are the consumer price index and the personal consumption expenditure price index, both indexes are backward-looking, using the past month's data to help with future decisions.

The Zillow Observed Rent Index (ZORI) proved to be a good predictor of actual inflation in both indexes, while the Zillow Home Value Index (ZHVI) can help predict movement in owners’ equivalent rent (OER), which carries even more weight in inflation due to homeowners far outnumbering renters.

According to Zillow, the ZORI showed that rent growth peaked in February 2022 at 17.2% and declined to 10.8% in September, pointing to a downward trend. As the ZORI shows true signs of deceleration in rent growth, it will be interesting to see when the PCE and CPI show signs of a slowing in year-over-year rent growth.

The CPI rent component is currently at 7.2% and is still in an upward trend as the September CPI revealed rent of a primary residence increased by 0.9% month-over-month.

San Francisco Fed researchers find the strongest correlation between CPI rent and ZORI at a 12-month lag, making February 2023 a candidate for a highly probable watershed moment in CPI rent inflation, Zillow reported.

As the monthly growth in the CPI rent component is averaging an 11% annualized pace, it appears that the deceleration in CPI rent inflation is a few months away, since monthly growth would need to drop sharply in order to sink below last autumn’s rate, per Zillow.

Why It Matters: Jeremey Siegel, Professor of Finance at the Wharton School of Business, joined CNBC’s "Squawk Box" on Monday morning and reported that he was shocked to find out that Powell said he is using the housing indicator that looks at past data.

Housing is 40% of the core inflation, but when you look at the forward indicators they’re showing negative prices in rental growth, while the backward-looking one shows positive price growth in rents, Professor Siegel said.

To read about the latest developments in the industry, check out Benzinga's real estate home page.

Siegel thinks the Fed will eventually see this discrepancy, and he is “shocked” as the forward indicators show inflation is down.

When the Fed revealed they were more hawkish now than in September, Siegel reported that since September we have not had any evidence of prices going up, besides the backward indicators.

Although the next CPI report will most likely show another increase, Siegel mentioned that Standard and Poor’s Case Shiller Index, Rental Indexes from Zillow, and housing starts are all going down.

Siegel thinks that this is an important issue to interpret where the forward indicators are pointing to inflation, which is why the market thinks Powell will eventually “see the light” and become more dovish.

© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Read the original article on Benzinga

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.