The U.S. Bureau of Labor Statistics (BLS) released July’s Consumer Price Index (CPI) last week and while inflation is falling in the United States, it is still above the Federal Reserve’s 2.0% target. Some components of CPI rose less than 2.0%. For example, energy was up 1.1% from July 2023 to July 2024, however, energy only makes up 6.9% of CPI (July 2024 CPI Report | jpmorgan.com). In the chart below you’ll see nearly 80% of CPI excludes food and energy. Digging further CPI is 61.1% services and 36.3% shelter.
Fundamentally it makes sense, with housing likely the largest expense for the average household. But with shelter such a large component of CPI, it’s important to consider how shelter is measured. The BLS could look at new tenant rent contracts, which were up 0.4% annually in the first quarter of 2024, but since most Americans are homeowners, the BLS goes a step further to construct a similar measure called “owner’s equivalent rent.” Owner’s equivalent rent rose 5.1% in the latest survey. To measure owner’s equivalent rent, the BLS splits the sample into six groups and staggers the measurement for each group every six months. For example, one group is surveyed in January and July, and another group is surveyed in February and August. The Federal Reserve acknowledges this measurement can cause lags in inflation data and some economists feel that the data is 9-12 months behind what is happening in real time. An argument in the same vein of you can’t eat core inflation (which excludes food and energy prices), no one actually pays owner’s equivalent rent. Overall, it means CPI will likely trend lower in the next few months as new data enters the survey. Why Housing Inflation is High | cnbc.com
Current data also points to a slowdown in housing. Zillow.com, which has access to a large database of real estate transactions, saw July prices rise 2.8% over the past year and projects a rise of 0.9% in the next twelve months. Overall, Zillow is seeing homes sell slower, with homes marked pending in 18 days, 6 more days than last year. With mortgage rates falling, it may bring more buyers to the market. Zillow Home Sales Forecast | Zillow Research Sellers lose their advantage | Zillow.com
New single-family home construction, called housing starts, fell 6.8% in July and is at its lowest level since May 2020. Building permits also fell 4%, showing that future months likely won’t reverse the trend in data. Housing Starts Plunge | kpmg.com New Residential Construction | census.gov
What the U.S. is building, is multi-family housing. In 2024 builders are on track to add 518,108 rental units, up 9% from 2023 and 30% from 2022 (New Apartment Construction to Reach Historic High | rentcafe.com). With a large supply of rental units coming to market, rent prices will likely level off.
With the rise in real estate prices and inflation, it’s no surprise that politicians are weighing in. While the Donald Trump Campaign has issued few specific policy solutions, the Kamala Harris Campaign released an economic plan to provide a $25,000 tax credit for first-time home buyers. Mark Zandi, an economist for Moody’s, feels that with a tight housing supply, the payment would lead to a direct increase in home prices. Other parts of Harris’ plan would provide tax breaks for new home construction and rehabilitating older housing stock, likely increasing the supply of housing. Zandi feels that the policy may be able to work, however, the timing would be crucial with the largest problem right now being housing supply and inventory. What Happens When You Give People Money to Buy Houses | axios.com
Weak Revisions to Payrolls: The Bureau of Labor Statistics released a revised payroll report for the 12-month period ending March 2024, revealing the U.S. job market created 818,000 fewer jobs than expected, about 68,000 a month. This is an annual revision, like revisions to GDP growth and economists predicted there would be a revision lower. On average the new monthly increase in payrolls is more likely to be around 174,000 a month versus the 242,000. While still expansionary, it points out the economy and job market were slowing sooner and faster than thought. U.S. Payrolls Marked Down | Bloomberg
Financial Planning/Investment Strategy Corner:
We’ve written before about how it is difficult to compare one generation’s accumulated wealth to a previous generation's wealth at the same age as each generation faces its own unique economic circumstances. The recent shift in Millennial and older Gen Z finances has been significant in the past four years, rising from $4.5 trillion to $14.2 trillion. You can see the increase in the chart below:
One of the main causes of the increase in wealth is housing, with it accounting for $2.5 trillion of the increase in wealth. Rising participation in 401k and investment accounts helped too, with the advent of automatic enrollment features in workplace plans. According to Vanguard, in 2006, 57% of employees aged 25-40 enrolled in workplace plans, and in 2022 it was 83% Looking at averages though, it may lead to assumptions that every Millennial or Gen Z is better off. Home prices have had a dramatic rise and depending on if and when someone purchased a home, it matters. The gap between the 80th percentile and the 20th percentile for net worth for Millennials was $343,000 in 2022, for Boomers the gap was $286,000 at the same age (adjusted for inflation). Millennials’ Finances | WSJ
Quick Hits:
- The benefits to weight training and longevity: To Delay Death, Lift Weights | outsideonline.com
- On the topic of weight lifting and needing more protein: Weight-loss success depends on eating more protein, fiber while limiting calories, study says | Illinois
- An interesting look at blue spaces: why time spent near water is the secret of happiness | The Guardian
- A guide to trail etiquette when hiking: 5 trail etiquette tips for your next hiking trip | Popular Science | popsci.com
“When the facts change, I change my mind” – This is a quote attributed to John Maynard Keynes and typically relates to investing and challenging your beliefs. A recent article about running your air conditioner when you are not home tore my Maine-born and engraved principles to shreds. The author starts the story by referencing a past article about leaving lights on in unoccupied rooms (I don’t quite know how I made it beyond that sentence, but I forged on). Based on the efficiency of air conditioning units made today, the author found it is more efficient to keep a home’s temperature tuned to the upper 70s when not home. This is opposed to allowing the home to bake up to some 80+ degree temperature to then attempt (and in my case - in vain) to bring the temperature back down to an acceptable level. While not a purely scientific study (I imagine a bit more control should be implemented – i.e. same apartments), alas, as I write this, I realize I sometimes leave the HVAC unit on in my office overnight and now feel a little less guilt. It’s Actually Okay to Run the AC All Day, Even If You’re Not Home | Wirecutter
Quote: “Many people, myself among them, feel better at the mere sight of a book.” – Jane Smiley
Also, by Jane Smiley: “Leaving any bookstore is hard, especially on a day in August, when the street outside burns and glares, and the books inside are cool and crisp to the touch.”
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