Shelter Inflation Will Continue to Slow Into 2025

There has been a recent irony in the multifamily industry. About 40% of the $1.5 trillion maturity wall properties face by the end of 2025 are multifamily. While it’s impossible to tell the percentage of that segment facing trouble, about a quarter of the $1.5 trillion total will have difficulty refinancing.

The irony is that as costs of financing rise, multifamily owners tend to increase rents. Those rents are an important part of the shelter costs that have been one of the largest drivers of overall inflation. So there has been a vicious circle. Higher inflation makes the Federal Reserve keep interest rates higher, which causes financing and refinancing prices on properties to cost more, leading to property owners to push up rents.

Which makes a new economic letter out of the Federal Reserve Bank of San Francisco of particular interest. The title is When Is Shelter Services Inflation Coming Down? Authors Òscar Jordà, senior policy advisor in the bank’s economic research department, and Aren Yalcin, a research associate in the department, noted that in July 2024, shelter services comprised 2.2 percentage points to a core (without energy or good) Consumer Price Index reading of 3.2% over the previous 12 months.

According to monetary policy, when interest rates rise, demand slows, and prices drop. But as rates rise, housing supply declines with increased construction costs. Eventually rents fall, but they do so more slowly than other goods and services.

But, as the letter states and GlobeSt.com has reported in the past, an imbalance between housing supply and tenant demand has sent property developers to build more housing, particularly in areas like the South where there have also been long-term demographic shifts. There were major needs for housing there and so, 2023 and 2024 have seen record high construction efforts and housing stock deliveries.

That shift in demand and supply has helped rein in housing prices, but they still lag considerably. According to the models used by the authors, shelter inflation should continue to decline to maybe as low as 2% by the end of 2024. Then they will begin to rise again by the middle of 2025 to a pre-pandemic average of 3.3%.

“This will contribute downward pressure to inflation overall, although the extent and speed of this adjustment in shelter inflation is highly uncertain,” they wrote.