There are people who saying US housing inflation is a problem that isn't going to go away. Here is a recent chart from Apollo, highlighting rising US house prices overlaid with rent. Does anyone else see a problem here?
The numbers on rent and owners-equivalent rent certainly correlate with each other but I don't see any correlation here with house prices. There are long periods of divergence and spikes that don't follow each other. Yes, there has been some correlation since mid-2022 but this chart shows that's largely the exception rather than the rule.
Contrast that with this chart, which is one I called 'the bull case for everything'.
It's the same OER line but correlated against rent prices. The indication here is that lower rents will work their way into the OER number, lowering inflation.
The two charts argue opposites.
"Housing inflation is my most-valuable indicator for the immediate future," the Fed's Goolsbee said in April, highlighting how it has been a puzzle.
So what's next? I'm a housing bull because I think there a problems of undersupply but that doesn't necessarily make housing inflation problematic. You can have home prices run without getting inflation above target, particularly if rents disconnect (which they historically have).
I the short term, I think softer market rents will continue to feed into CPI and that's the trade for now. However the market is going to get anxious about rising house prices for the remainder of the decade. Whether you believe in that story or not, it's a good hedge and the ways to trade it are:
- Homebuilders
- Anything with torque to home remodelling (retailers and suppliers)
- Lumber
- Banks
- US household spending
- The US dollar
