Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Is Falling While House Prices Keep Climbing
Transcript
- Lucas: So Luna, I keep seeing this headline in the financial press: rents are falling, but house prices are still climbing. And for anyone not deep in the data, that feels contradictory. How can the cost of shelter — the biggest single line in the CPI — be going down while the cost to buy a home keeps hitting records? Luna: It does seem backwards. And it's not just a headline thing — the June CPI actually showed rents down for the third straight month. But if you look at the Case-Shiller index, home prices are up like four percent year-over-year. What gives? Lucas: Right, and that's the puzzle. The key is to remember that the CPI's shelter measure is not the same as what you'd see in a real-time rental listing. The government surveys renters and homeowners, and it captures what people are actually paying, not what new leases are going for. And that data has a lag — a big one, sometimes six to twelve months. Luna: So the CPI is telling us about yesterday's rents, not today's. But even so, the fact that it's falling now suggests the market peaked a while back. And yet home prices are still climbing. That's the weird part — why haven't they followed? Lucas: Well, let's break it down. The CPI shelter index has two main pieces: rent of primary residence, which is what renters pay, and owners' equivalent rent — OER — which is what homeowners would pay if they rented their own home. OER is about three times the weight of the first. And both have been decelerating for months. But the housing market — the actual transaction prices — is a different animal. Luna: And that animal is still running hot. Why is that? Isn't it the same supply and demand? Lucas: You'd think so, but the drivers are different. Rents are set by income and vacancy rates. When the job market softens — and we saw that with the July jobs report, where the economy lost 23,000 jobs — people pull back on moving, they double up, they negotiate harder. That pushes rents down. Home prices, though, are more about financing costs and the existing stock of homes for sale. And there's still a structural shortage of single-family homes in many areas. Luna: But didn't higher mortgage rates cool that off? I mean, rates went from three percent to over six percent. That should have killed demand. Lucas: It did cool it, but it also froze supply. Existing homeowners with low-rate mortgages are staying put — the lock-in effect. That means fewer listings, so the available inventory stays tight, and prices keep grinding up. Meanwhile, new construction is skewed toward higher-end units because of material and labor costs. So you've got a market where rents are falling because there's more supply in the multifamily pipeline, but single-family prices are sticky because there just isn't enough of the right kind of housing. Luna: So the CPI is capturing the rental market, which is genuinely cooling, but the home price indices are capturing something else. That's why the two can diverge. And it's not just a curiosity — it matters for the Fed, right? Lucas: It matters a lot. Shelter is about a third of the CPI basket. Even a small decline in that component drags down headline inflation. And the June CPI did fall — the all-items index dropped from 333.98 to 332.6, which is a meaningful month-over-month decline. Core CPI also edged down, from 336.12 to 336.1. That's not a huge move, but the trend is there. Luna: And that's giving the Fed cover to hold rates where they are. The effective federal funds rate has been flat at 3.63 percent since July. Does the housing data strengthen the case for a cut later this year? Lucas: It's one of the arguments. The Fed watches core PCE more closely than CPI, and that's been mixed — the overall PCE index fell in June, but core PCE ticked up slightly, from 130.09 to 130.3. So the inflation picture isn't uniformly cooling. But if shelter keeps dragging down CPI, and the jobs market is softening as we saw in July, then the case for a cut builds. The bond market seems to think so — the ten-year breakeven inflation rate ticked up to 2.29 percent, which is still pretty anchored. Luna: So investors aren't panicking about inflation, but they're also not expecting a big drop. That's why gold is rallying, right? I saw gold is up over four percent in the last five days — sitting around forty-four hundred dollars. Lucas: Exactly. Gold often moves on real interest rates and sentiment. With the Fed on hold and the labor market cooling, you get demand for gold as a hedge against uncertainty. It's not necessarily a bet on inflation raging — it's more a bet that central banks will keep policy loose and that we might see more volatility. The fact that the ten-year breakeven went up slightly while gold jumps suggests it's more about rate-cut expectations than inflation fears. Luna: So if rents keep falling, and that pulls inflation down, the Fed could cut rates — which would boost home prices even more? That seems like an unintended consequence. Lucas: It is. Lower rates make mortgages more affordable, which could bring more buyers off the sidelines, and with supply still tight, prices could keep climbing. Some economists worry that a rate cut would just reignite housing demand and offset any disinflationary gains. It's a delicate balance. Luna: And that's the kind of thing that makes me appreciate having a space to talk through these angles without the noise. You know, we hear from listeners all the time who say they finally understand why their rent or their grocery bill is doing what it's doing. That's what keeps us going. Lucas: It really is. And if you're one of those listeners who's gotten something out of the show, a small way to keep it ad-free and independent is to support us at buy me a coffee dot com slash fexingo. Even a few bucks helps cover the costs of keeping these conversations going. No pressure — just if it's made a difference for you. Luna: Yeah, it's a nice way to say thanks if you can. We're back to the housing puzzle in a second — but I want to pick up on something you said earlier about the rental supply pipeline. You mentioned that multifamily construction has been booming. Is that a cyclical thing or a structural shift? Lucas: It's partly cyclical — builders overreacted to the post-pandemic rental surge and started a ton of projects. Those are coming online now, which is why vacancy rates are rising and rents are softening. But there's also a structural component: millennial and Gen Z households are forming at a slower pace than previous generations, partly due to affordability. So the demand side is just not as strong as it was a few years ago. Luna: So we might see rents continue to fall for a while. But if that pulls down inflation, and the Fed cuts rates, and then home prices spike again — could that eventually push rents back up? It feels like a cycle. Lucas: It could, but not immediately. There's a lag between when rates change and when they affect the rental market. And even if home buying picks up, it takes a while for that to translate into rental demand. So we could have a period of low rent growth — maybe even declines — for the next year or so, even as the housing market stays tight. That's actually a plausible base case. Luna: What does that mean for someone who's thinking about buying a home right now? Should they wait for rents to fall more, or jump in before rates drop? Lucas: That's the million-dollar question. If you're a renter, falling rents are great news — you have more negotiating power. But if you're a buyer, you're caught between high prices and high rates. Waiting for rates to drop might backfire if prices keep climbing. But buying now means locking in a higher rate. There's no one-size-fits-all answer — it depends on your timeline and your local market. Luna: And local is key. I've seen data showing that some Sun Belt cities are seeing double-digit rent declines, while coastal markets are barely moving. The national average hides a lot. Lucas: Right. Austin, Phoenix, Las Vegas — those saw a massive supply boom, and rents are down significantly. Meanwhile, New York and Boston have tighter vacancy rates, so their rents are more stable. That's why you always have to look at your own market rather than the national headline. Luna: And that's also why the CPI shelter number can feel disconnected from your personal experience. If you live in one of those booming Sun Belt cities, you might see your rent drop while the national index still shows a slight increase. Lucas: Exactly. The CPI is an average, and it's a lagging average. So when you hear that shelter costs are 'still rising' in the CPI, but you know your rent went down, both can be true. It's just a matter of timing and geography. Luna: Let's talk about the owners' equivalent rent for a second. That's the one that confuses people — it's not a real cash payment. How does that get measured, and why is it so important? Lucas: It's a statistical construct. The Bureau of Labor Statistics asks homeowners: if you were to rent your home today, what do you think it would fetch? They use that to estimate what it would cost to rent the same housing services a homeowner consumes. It's not a transaction — it's a thought experiment. But because it's about a third of the total CPI, even a small change in that number moves the whole index. And it tends to be more stable than actual market rents because it's based on a survey of existing homeowners, not new leases. Luna: So it's slow-moving and it lags reality. That means the decline we're seeing in market rents now might not show up in OER for another year. Lucas: Precisely. And that's a big reason why core inflation has been sticky. The OER component has been climbing even as market rents fall, because it's catching up to the surge from a couple of years ago. Once that catches up, we could see a significant downward pull on core CPI. Luna: That would be a big deal for the Fed's timeline. If OER starts turning negative, inflation could drop faster than expected, and they might cut rates more aggressively. Lucas: It's possible. And that's what some analysts are watching for in the next few months. The June data showed core CPI barely moving, but if shelter turns, that could change the picture. The bond market's breakeven rate is already at 2.29 percent, which suggests they expect inflation to hover around the Fed's target. But a sharp drop in OER could push it even lower. Luna: So we're at a potential inflection point. The rental market is telling us one thing, the home purchase market is telling us another, and the Fed is waiting to see which one wins. Lucas: That's the crux. And it's why this divergence is more than an academic curiosity. It affects your rent, your mortgage rate, and the interest on your savings. As we head into the fall, the data on shelter and jobs will be the two biggest drivers of what the Fed does in September and December. Luna: And if rents keep falling, that's good news for renters, but it might not be enough to offset the pain of high home prices for buyers. It's a mixed bag. Lucas: It is. But at least now you know why the two markets can move in opposite directions. And if someone asks you why your rent went down but the news says housing is expensive, you've got the answer: rents and home prices are different markets, measured differently, and they're telling different stories about where the economy is headed. Luna: And that's the kind of insight that makes this show worth sharing. Thanks for being here with us as we untangle it.