There are those who say housing inflation in the United States is a problem that will never go away. Below is a recent chart from Apollo, highlighting the rise in US home prices as well as rent. Does anyone else see a problem here?
Granted, the rental numbers and equivalent rent for owners correlate with each other, but I don't see any correlation here with house prices. There are long periods of divergence and highs that do not follow each other. Yes, there has been some correlation since mid-2022, but this chart shows that this is very much the exception rather than the rule.
Compare that with this chart, which I call “The Bull Case for Everything.”
It's the same line as OER but tied to rental rates. The signal here is that lower rents will work their way into the OER number, bringing down inflation.
The two charts argue in opposites.
“Housing inflation is my most valuable indicator in the near future,” the Fed's Goolsbee said in April, highlighting how much of a mystery it is.
So what's next? I'm a housing proponent because I think there are undersupply problems but that doesn't necessarily make housing inflation a problem. It is possible for housing prices to continue without the inflation rate exceeding the target, especially if rents are cut off (which has happened historically).
In the short term, I think weak market rents will continue to feed into the CPI and that is where it trades at the moment. However, the market will be concerned about rising home prices over the remainder of the decade. Whether you believe this story or not, it is a good hedge and the ways to trade it are:
- Home builder
- Anything with Torque for Home Remodeling (Retailers & Suppliers)
- the wood
- Banks
- US household spending
- U.S. dollar
