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 headlines about rents finally cooling off, but then I look at home prices and they're still setting records. How do we square that? Luna: It's honestly one of the weirdest parts of this whole inflation story. And it hits people right in the wallet, whether they rent or own. Lucas: Yeah. And the latest numbers we're looking at, from mid-August 2026, they show that divergence clearly. Rent on new leases has been falling for a while now, but the CPI shelter index is still grinding up. Luna: Because CPI measures what people are actually paying, not what new renters are signing. And most renters have leases that only change once a year. Lucas: Right. So even as market rents drop, the average rent paid keeps rising because it's catching up to the spikes from a couple of years ago. That lag is why shelter feels sticky even as the broader inflation cools. Luna: And that sticky shelter number is a big chunk of CPI. I think it's about a third of the index. So it matters a lot for the Fed's math. Lucas: It does. And that's why I wanted to dig into this today, because there's a real puzzle here. If rents are falling, why do house prices keep climbing? And what does that mean for your monthly budget? Luna: Let's start with the rent side. What's actually happening out there? Lucas: So in a lot of big metros, we're seeing a wave of new apartment supply hit the market. Builders finally caught up after years of underbuilding. That's pushing vacancy rates up and giving landlords less pricing power. Luna: Which means new renters can actually negotiate. That's a huge shift from a couple years ago when you'd get outbid on a one-bedroom. Lucas: Exactly. And that's why the 'asking rent' data from places like Zillow or Apartment List has been negative for several months now. But the CPI, which lags, is still showing increases. Luna: So when does the CPI actually start to reflect those lower rents? Lucas: It's coming, but slowly. Economists call it the 'shelter lag.' It can take six to twelve months for those new lease prices to show up in the CPI. That's why the July CPI, which came out a few weeks ago, still had shelter up. Luna: But if the lag is real, then the stickiness should fade. We should see shelter inflation cool off later this year, right? Lucas: That's the hope. And actually, the PCE index — the Fed's preferred measure — already shows a bit more cooling. The June PCE came in at 131.4, slightly down from the prior month. That's partly because PCE weights rents differently. Luna: So the Fed is seeing some relief on the inflation front, even if consumers aren't feeling it yet in their rent checks. Lucas: But here's the twist. While rents are cooling, home prices are still climbing. The S&P CoreLogic Case-Shiller index, which tracks home prices nationally, has been hitting new highs all year. Luna: That's the part that confuses people. If housing is becoming more affordable to rent, why does buying a home feel more impossible than ever? Lucas: Because the two markets are driven by different forces. Rent is driven by supply and demand for rental units. Home prices are driven by supply and demand for owned homes, plus mortgage rates, plus investment demand. Luna: And right now, there's just not enough existing homes for sale. People who locked in low mortgage rates a few years ago aren't selling and giving that up. Lucas: Exactly. So you've got a supply crunch at the same time that there's still strong demand from first-time buyers and even investors. That keeps pushing prices up, even as rents soften. Luna: So it's basically two different markets that we keep lumping together under the word 'housing.' Lucas: That's the core insight. And it's why the Fed's job is so tricky. They can't just target 'housing inflation' — they have to watch both sides, and those sides are pulling in opposite directions. Luna: Before we go deeper into what the Fed might do next, I want to take a quick step back. This show has been helping us make sense of all this stuff for a while now — inflation, housing, the bond market — and honestly, a couple of dollars a month is genuinely what keeps these going. If you've gotten something out of them, you can buy me a coffee dot com slash fexingo. It's a small way to keep us ad-free and digging into these questions. Lucas: Yeah, it really does make a difference. And we appreciate everyone who's supported the show — it lets us keep doing the research and talking through these numbers with you. Luna: Okay, so back to the Fed. Given this split — rents cooling, home prices hot — what are they likely to do? Lucas: Well, the Fed Funds rate has been sitting at 3.63 percent, which is still restrictive. And with inflation running above their 2 percent target — the 10-year breakeven is at 2.34 percent — they're probably going to stay patient. Luna: But they've signaled they're done hiking. So it's more about how long they hold rates here. Lucas: Right. And that's where the Treasury's actions come in. Treasury Secretary Bessent has been pushing this bond buyback program, trying to calm the market. But so far, it's been stirring up inflation worries instead. Luna: Because buying bonds injects liquidity, which can be inflationary. And that's the last thing the Fed wants when they're trying to cool things down. Lucas: Exactly. And it's happening against a backdrop of the national debt crossing $40 trillion — more than double what it was a decade ago. That's a lot of supply coming to market, and the Treasury is trying to manage it without blowing up rates. Luna: So the bond market is basically the battleground for inflation expectations right now. Lucas: And that feeds back into housing. Because mortgage rates track long-term Treasury yields. If the bond market gets spooked about inflation and pushes yields up, mortgage rates go up, which makes home buying even less affordable. Luna: But that might also push more people into renting, which could keep rents soft. So it's this weird feedback loop. Lucas: It is. And honestly, that's the thing I want listeners to take away today. The 'housing market' isn't one thing. Rent and home prices are on different tracks, and the policies that affect them — Fed policy, Treasury operations, debt levels — pull at both ends. Luna: So for a renter, the next year might actually bring some relief. But for a would-be homebuyer, it's still going to be rough. Lucas: Yeah. And that's not a prediction, it's just reading the data we have. The market rents are falling, the CPI will eventually catch up, but home prices are likely to stay elevated until something breaks the supply logjam. Luna: What could break it? More new construction? A drop in mortgage rates? Lucas: Probably a combination. If rates come down enough, some homeowners might finally list and trade up. And we're seeing a lot of apartment construction, but not enough single-family homes, especially in affordable suburbs. That's where the real shortage is. Luna: So it's not just about the Fed. It's about zoning, land costs, labor shortages — all those structural things. Lucas: Exactly. And that's why this episode isn't just a 'Fed watch.' It's about understanding how the parts fit together. The bond market, the debt, the rental market, the for-sale market — they're all one system. Luna: And it's a system that still feels broken for a lot of people. Even as inflation cools, the cost of shelter — whether you rent or buy — is still a huge chunk of your paycheck. Lucas: It is. And the data backs that up. CPI shelter is still high, even if the trend is improving. So the question for the rest of 2026 is whether that improvement reaches your bank account. Luna: And whether the bond market lets it. That's the part that keeps me up at night. Lucas: Fair. But that's exactly why we do this show — to make sense of that noise. And hopefully, next time you see a headline about 'cooling inflation' while your rent goes up, you'll have a better idea of what's actually going on.