Rents are rising, adding to inflation fears

The inflation will be exacerbated by the rise of rents until the end of the year, according to economists.

Many prospective homeowners are choosing to rent longer, because of the high home prices and mortgage rates. The cost of living for millions of Americans is increasing because of a housing-supply shortage. The median monthly asking rent even exceeded $2,000 for the first time in May, according to Redfin.

The Federal Reserve is trying to address the very enemy that is feeding into inflation. Shelter, including rental costs and owners equivalent rent, or what a homeowner could rent their home for, makes up about a third of the Consumer Price Index, a key inflation gauge.

In the first half of this year, rents have increased by 5.4% nationwide, according to a report by Apartment List. That is a slower rise than the jump in rents over the same period last year, but big cities are still seeing some absurd swings in rental prices. Rents in New York City, for example, are up 27% over the past year, according to Apartment List. The San Jose metropolitan area has seen the fastest rent growth over the last six months, while prices in Boston, Seattle and even smaller markets like Hartford, Conn. and Providence, R.I. are also increasing.

Rents are rising given housing supply is still tight, and prices are also going through the roof, Jennifer Lee, senior economist at BMO Capital Markets, told MarketWatch.

She added that housing, or owners equivalent rent, is over 20% of the CPI index, which is concerning as it will add to already high inflation pressures. Peak inflation is not here yet, another sign that peak inflation is not here yet. With home prices showing signs of dropping in some overheated markets, there could be some relief for renters.

Kathy Bostjancic, chief U.S. economist at Oxford Economics, told MarketWatch that home prices lead to rental prices by at least 12 months.

She said that a cooling in the pace of home-price gains should eventually lead to a cooling of rental prices - likely sometime in mid- 2023.

Even so, inflation may continue to burn low-income people and people of color — who have already had a disproportionately hard time staying current with their housing payments during the epidemic, in the months to come.

A household is considered to be cost burdened if they put more than 30% of their income toward rent in the year 2019 - it is a reality for about 46% of renters, according to the Joint Center for Housing Studies of Harvard University. In the same year, lower-income households made up 62% of the cost-burdened households and 86% of households that spent half or more of their income on rent.

Even a slight increase in rent can spell disaster for those families, because they might not have enough financial wiggle room to make it work.