President-elect Donald Trump faces a significant challenge in curbing inflation: the stubbornly high cost of housing. While recent data shows a slight slowdown in housing inflation, the annual increase remains substantial, contributing significantly to overall price increases. This presents a complex dilemma for the incoming administration, as federal policymakers have limited direct influence over this key component of the Consumer Price Index (CPI). The interplay between interest rates, housing supply, and the president-elect’s economic policies creates a precarious situation that could significantly impact his ability to meet his inflation goals.
Key Takeaways: Navigating the Housing Inflation Maze
- Housing costs, a major driver of inflation (accounting for about 40% of the recent CPI increase), are slowing but remain elevated.
- While rent increases are moderating, the annual rise is still significant (around 3.3% nationally), significantly above historical levels.
- High interest rates, intended to combat inflation, are paradoxically contributing to higher mortgage costs and slowing the decline in home prices creating a difficult cycle.
- President-elect Trump’s proposed policies, including deregulation, could either ease or exacerbate housing-related inflation depending on their implementation.
- Economists express mixed views, with some expressing optimism about a normalization of rent prices but others cautioning that shelter expenses remain a powerful inflationary force.
Still Rising, But Not As Fast: The Slow Descent of Housing Inflation
Housing inflation, while peaking in March 2023, has been on a slow, uneven decline. The November consumer price index (CPI) report revealed mixed signals. On one hand, it marked the smallest full-year increase since February 2022, and key rent components saw their smallest monthly gains in over three years. However, the annual rise in shelter costs still reached 4.7%, a level last seen (excluding the Covid era) in mid-1991. This persistent upward pressure stems from a prolonged period of housing supply failing to meet demand, a condition dating back to the early days of the Covid-19 pandemic and still unresolved. Realtor.com data indicates that housing supply in November was approximately 17% below its level five years ago. This shortage, combined with increased interest rates, continues to prop up housing costs.
Rent’s Persistent Upward Trend
Rents, a significant factor in the CPI, have also shown mixed trends. While the average national rent in October ($2,009) dipped slightly from September, it remained 3.3% higher than a year ago, reflecting a cumulative increase of roughly 30% nationally over the past four years. This sustained growth, even with the recent moderation, highlights the continued pressure within the rental market.
The Mortgage Rate Paradox
The Federal Reserve’s efforts to curb inflation by cutting its benchmark borrowing rate have had an unexpected side effect. Although the Fed has reduced its rate by three-quarters of a percentage point since September (with another quarter-point cut anticipated), 30-year mortgage rates have actually increased during the same period. This counterintuitive outcome demonstrates the complex and sometimes unpredictable relationship between monetary policy and the housing market.
Optimism and Concerns: A Divided Outlook
Despite the persistent challenges, some economists express cautious optimism. Bank of America economist Stephen Juneau noted that rents might be “finally normalizing to levels consistent with 2% inflation,” and Evercore ISI’s Krushna Guha suggested that the November housing data would be viewed “encouragingly” by the Federal Reserve. However, this nascent optimism is tempered by concerns that shelter expenses remain the primary driver of higher prices, even with the slowing rate of increase. Robert Frick, corporate economist at Navy Federal Credit Union, emphasized that the continued elevated levels remain a significant issue.
President-Elect Trump’s Policy Tightrope
President-elect Trump’s economic policies, particularly his emphasis on deregulation, present both opportunities and risks in addressing housing inflation. Deregulation could potentially increase housing supply by opening up federal land for construction and reducing barriers for homebuilders, potentially lowering housing costs. However, his inclination toward lower interest rates, while potentially stimulating demand, could also reignite inflationary pressures. Economists remain divided on the net impact of these policies.
The Catch-22 of Housing and Interest Rates
The current situation presents a complex catch-22. As Lisa Sturtevant, chief economist at Bright MLS, notes, “We’re not going to drop rates until shelter costs come down. But shelter can’t come down until rates are lower.” This cyclical dependency underscores the difficulty of achieving a rapid resolution to the housing inflation problem. Further complicating matters are the numerous unpredictable factors that could influence the market, underscoring the inherent uncertainty in forecasting future housing costs and their impact on inflation.
The Unanswered Questions
The path forward remains uncertain. While the recent slowdown in housing inflation offers a glimmer of hope, the continued elevated levels and the interconnectedness of interest rates, housing supply, and government policies create a challenging environment for President-elect Trump. Successfully navigating this complex situation will be crucial for meeting his stated inflation goals and securing a stable economic future.
