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 that rents are falling in some of the biggest cities, but then the Case-Shiller index just posted another record high. How do you square that? Luna: Honestly, I can't. It feels like the market is sending two completely different signals. Which one should we trust? Lucas: That's the right question, because both are true. It's not a data glitch, it's a structural split. And it's been building for years, but this summer it's gotten really stark. Let's start with the rent side. Lucas: The CPI shelter index, which is mostly rent, was up only about three and a half percent year-over-year as of July, down from over eight percent at the peak in 2022. And in some metros, actual asking rents are down five, six percent from last year. That's a big deal. Luna: So why are rents cooling? Is it just that all those apartment buildings that broke ground during the pandemic are finally coming online? Lucas: Exactly. There was a massive multifamily construction boom, especially in the Sun Belt. Austin, Phoenix, Atlanta, those cities added tens of thousands of units. And now they're delivering all at once. When supply surges that fast, landlords have to compete on price to fill units. Lucas: So you're seeing concessions like two months free, and in some cases actual rent cuts. The rental vacancy rate is now around six percent, which is the highest it's been in over a decade. Luna: Okay, so that explains the rent side. But what about house prices? If rents are falling, shouldn't home prices follow? They're both housing. Lucas: You'd think so, but house prices are driven by a different set of forces. The biggest one is the lock-in effect. Millennials are at peak first-time buying age, and there just aren't enough homes for sale. Existing homeowners with three percent mortgages are not moving, because they'd have to trade that in for a seven percent mortgage, and the monthly payment would jump. So inventory is stuck at historic lows. Lucas: That supply crunch, combined with steady demand and a strong job market, keeps pushing prices up. The S&P 500 is up, but house prices are up even more in many places. It's a classic supply-demand imbalance that has nothing to do with rental rates. Luna: But doesn't that create a disconnect? If rents are falling, shouldn't that eventually drag down home prices, because the rental income that supports an investment property is dropping? Or is that too rational? Lucas: It's rational, and it's happening, but slowly. You're talking about the yield on a rental property. If rents fall, the cap rate compresses unless prices adjust. And they haven't. So you've got a real divergence between the rental market and the for-sale market. And it's not just in the US—Canada is seeing something similar, and even Singapore just reported inflation at a near two-year high, partly because of housing costs. Luna: So how does this feed into the inflation numbers that the Fed actually watches? Because I thought shelter was the sticky part of inflation. Lucas: It's still sticky, but the direction matters. The CPI shelter index is up three and a half percent year-over-year, but the core PCE price index, which the Fed prefers, has shelter rising faster—around four and a half percent. That's because PCE weights owner's equivalent rent differently, and it's catching up to the earlier surge in house prices. Lucas: So you've got CPI showing cooling shelter, but PCE showing sticky shelter. That's one of the reasons the Fed is being cautious about cutting rates. They don't want to declare victory on inflation when the PCE measure is still running high. Luna: And the 10-year breakeven inflation rate is around two point three four percent, which is close to the Fed's target, but not below it. So the market is sort of saying, we're almost there, but not quite. Lucas: Yeah, and that's the sweet spot for this episode. The rent versus house price split is actually a window into how inflation is becoming more about specific sectors than a broad trend. Rent is cooling, but other services, like car insurance, are still hot. House prices are immune to the rental slowdown because of the lock-in effect. Lucas: And that's why we do these deep dives. It's not just about the headline CPI number, it's about what's actually happening underneath it. If you walk through the economy with us and something clicks, that's exactly why we keep this show ad-free. Luna: Yeah, no ads, no sponsors telling us what to cover. If you want to support that, the link is buy me a coffee dot com slash fexingo. It helps us keep doing this. Lucas: And it's a small way to say, we value this kind of deep dive. Now, back to the housing split. Let's talk about what this means for the average listener, because it's not just an academic puzzle. Lucas: If you're a renter, this is good news, at least in the short term. You might have more negotiating power than you've had in years. Landlords are offering concessions, and in some cities, you can get a nicer apartment for less than you paid last year. Luna: But if you're a homeowner, you might be feeling pretty good about your equity, but you're also more locked in than ever. Selling means giving up that low mortgage rate, so you're staying put, which means you're not buying a new house, which keeps the supply tight. Lucas: Right, it's a feedback loop. And for anyone trying to buy a first home, it's brutal. You're competing for a tiny number of listings, and prices keep climbing. The only thing that could break the loop is if mortgage rates drop enough that the lock-in effect weakens. Lucas: And we might be heading that way. The Fed has signaled it wants to cut rates, but the recent inflation data has them hesitating. The July jobs report was actually a miss, so there's some pressure to act, but the core PCE is still above target. Luna: So we might see a rate cut in September, but maybe not a big one. And even if they cut, mortgage rates might not fall as much as people hope, because the long-term bond market is already pricing in a lot of that. Lucas: Exactly. The ten-year Treasury yield is hovering around four point two percent, and that's what mortgage rates track, not the fed funds rate. So unless the Treasury market moves, mortgage rates stay high, and the lock-in effect persists. Lucas: There's also this other angle: the Treasury's recent bond buyback program. I know it's a bit inside baseball, but it's worth mentioning because it's aimed at calming the long end of the curve, and if it works, it could bring mortgage rates down. Luna: But I've read that it's actually stirring up inflation worries, because buying bonds with money from the Treasury General Account is a bit like printing money to buy debt, which could be inflationary. Lucas: Exactly. So you've got this tug of war: the Treasury wants to smooth the yield curve, but the bond market is skeptical. If the buybacks are seen as inflationary, long-term yields could actually go up, not down. And that would keep mortgage rates elevated. Lucas: So the housing split is really a microcosm of the whole inflation puzzle. We're not in a broad-based inflation crisis anymore, but we're dealing with specific pockets of stickiness, and the policy tools are a bit blunt. Luna: So what's the takeaway for the person listening? Should they be more optimistic or pessimistic about their housing costs? Lucas: I'd say cautiously optimistic if you're a renter, because the supply wave isn't done. There are still more multifamily units in the pipeline, so rent growth should stay muted for another year or two. But if you're looking to buy, patience is key. Don't overextend yourself just because you're worried about being priced out forever. Lucas: There's a good chance that once the lock-in effect unwinds, either through lower rates or just time, inventory will come back, and price growth will moderate. But I wouldn't hold my breath for a crash. The demand is still there. Luna: And in the meantime, the CPI shelter number will keep falling, which will help the overall inflation rate, but the PCE number might stay sticky, which will keep the Fed on edge. It's a fascinating divergence. Lucas: It really is. And the next few months will tell us which measure the market believes. If the Fed starts cutting rates while PCE shelter is still running hot, they risk letting inflation re-accelerate. But if they wait too long, they might miss the chance to support the economy. Lucas: Either way, the housing market is going to be the battleground for the rest of 2026. And for us, it's a reminder that inflation isn't a single number—it's a collection of very different, sometimes contradictory, stories. Luna: And that's what we're here to untangle. Thanks for listening, everyone. We'll be back with another deep dive soon.