(Bloomberg) -- A slump in rents that has curbed inflation in the U.S. may soon end, protecting the economy from further slowdowns in consumer prices or a destructive bout of deflation, say economists at Morgan Stanley and UBS Securities.
The consumer-price index fell 0.1 percent in April, and so- called core costs, which exclude food and fuel, climbed over the past 12 months at the slowest pace in four decades, a Labor Department report showed yesterday. Owners-equivalent rent, one of the categories designed to track rental prices, was unchanged in April and fell 0.2 percent from a year earlier, the first decline since records began in 1982.
Lower vacancy rates, gains in employment and rising real- estate investment trusts all indicate rents are about to bottom, if not turn higher, economists and analysts said. Those monthly house payments account for about 40 percent of core prices, meaning stabilization in the industry will put a floor under inflation.
Declines in rents will end over the next three to six months, signaling “there’s limited downside for core CPI and a pickup in core CPI going ahead,” David Greenlaw, Morgan Stanley’s chief fixed-income economist in New York, said in an interview. “That would limit your concerns” about less inflation or even deflation.
Falling prices would hurt the world’s largest economy by making it more difficult for borrowers to pay back loans. In addition, deflation prompts consumers and businesses to hold back on purchases as they wait for prices to fall further.
Vacancy Rate
The rental vacancy rate dropped to 10.6 percent in the first three months of the year after reaching a record high of 11.1 percent from July through September 2009, according to Commerce Department data. Private reports show that apartment rents are starting to rise.
“It appears several apartment markets may have bottomed and may be on track to recovery,” Lloyd Lynford, chief executive officer of Reis Inc., a New York-based property research firm, said on a conference call May 6.
An improving economy and signs of job growth are encouraging Americans who may have had roommates or moved in with relatives during the recession to seek their own places, Dustin Pizzo, a REIT analyst at UBS Securities LLC in New York, said in an interview. The improvement is occurring about six to nine months before analysts had expected, he said.
“Rents had been a huge drag on the core CPI last year and that seems to be fading,” UBS Securities economist Samuel Coffin, said in an interview. “It takes away a big source of downward pressure on core inflation.”
Core Prices
Core consumer prices rose 0.9 percent in the 12 months to April, the smallest gain since 1966, figures from the Labor Department showed yesterday. Excluding shelter costs, core prices were up 2.2 percent from a year earlier, Morgan Stanley’s Greenlaw said.
The government tracks two rental categories, one from observations of actual home and apartment rents and another designed to impute a rental value on owner-occupied homes, known as owners-equivalent rent or OER.
“When the kind folks at various dovish Fed banks tell you that the deceleration in core consumer prices is not primarily about shelter costs, you should take the assertion with more than a grain of salt,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said in a note to clients yesterday.
Payroll Gains
Rents “seem to have leveled off in the past two or three months, and as household income growth begins to accelerate in tandem with payrolls gains, rent and OER will begin to rise,” he said.
Not all economists are convinced rents are headed higher. Many of the measures used to show rents are climbing are based on surveys of large apartment buildings, which “are not representative of the housing stock,” JPMorgan Chase & Co.’s chief economist in New York Michael Feroli said in a note to clients. Payments for single-unit dwellings, which make up a larger proportion of the CPI’s owner-equivalent-rent component, are “rising more slowly,” Feroli said.
Sumber: Bloomberg Businessweek
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