Inflation hits rental market as higher mortgage rates, limited supply pushes up prices: Real estate expert

Macro Trends Advisors LLC founding partner Mitch Roschelle explained on Monday why inflation and higher mortgage rates translate to soaring prices for apartment rentals. 

Speaking on "Varney & Co.," Monday, the real estate expert argued that higher mortgage rates make it more difficult to buy homes, leaving more people turning to the rental market while supply is limited.

Mortgage rates dropped last week to their lowest level since April, offering some relief to prospective home buyers who have faced higher rates and soaring prices for real estate. According to data from Freddie Mac, the 30-year loan, the most popular among new homeowners, dipped back below the 5% mark. 

The average rate for a 30-year fixed-rate mortgage dropped to 4.99% for the week ending August 4, which was down from the week before when it averaged 5.3%, according to the mortgage giant’s Primary Mortgage Market Survey. Last week’s figure was still significantly higher than the 2.77% figure the year before. 

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"When you have the factor of higher mortgage rates, meaning it’s probably harder to buy, people lean towards renting," Roschelle told host Stuart Varney. 

"When the job market’s strong they are employed, so they can afford rent and inflation just raises the price of everything."

On Friday it was revealed that U.S. job growth unexpectedly accelerated in July, defying fears of a slowdown in hiring even as the labor market confronts the twin threats of scorching-hot inflation and rising interest rates.

Employers added 528,000 jobs in July, the Labor Department said in its monthly payroll report released Friday, blowing past the 250,000 jobs forecast by Refinitiv economists. The unemployment rate, meanwhile, edged down to 3.5%, the lowest level since the COVID-19 pandemic began more than two years ago. 

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Meantime, the Labor Department revealed last month that inflation accelerated more than expected to a new four-decade high in June. 

The department said the consumer price index, a broad measure of the price for everyday goods, including gasoline, groceries and rents, rose 9.1% in June from a year ago. Prices jumped 1.3% in the one-month period from May. Those figures were both far higher than the 8.8% headline figure and 1% monthly gain forecast by Refinitiv economists. 

The data marked the fastest pace of inflation since December 1981. 

Shelter costs – which account for roughly one-third of the CPI – sped up again in June, climbing 0.6%, matching an 18-year-high set in May. On an annual basis, shelter costs have climbed 5.6%, the fastest since February 1991. 

Rent costs also surged in June, jumping 0.8% over the month, the largest monthly increase since April 1986. Rising rents are a concerning development because higher housing costs most directly and acutely affect household budgets. 

July’s inflation data will be released on Wednesday. 

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Roschelle noted that if rent is more expensive, "discretionary spending items go by the wayside and then people start taking second jobs just to do what? Feed themselves, food and shelter." 

"It’s crazy, but that’s exactly what happened during the ’70s," he continued.  

Roschelle noted that he reviewed data from the 1970s and said that the dynamics are "identical to what they are right now." 

"And what happened in the ’70s? Rents went through the roof, so it’s eerily reminiscent of the Carter days," he warned. Americans had experienced an inflation spike in the 1970s, which posed a big shock to the economy.

U.S. existing home sales dropped to a fresh two-year low in June as rising mortgage rates and the relentless increase in home values slowed activity by edging prospective homebuyers out of the market.

Sales of previously owned homes tumbled 5.4% in June from the previous month to an annual rate of 5.12 million units, the lowest level since June 2020, according to data released late last month by the National Association of Realtors. It marks the fifth consecutive month that sales have declined. On an annual basis, home sales plunged 14.2% in June. 

The slowdown in sales came as the national median home price surged higher in June, hitting a new record of $416,000. That's up 13.4% from the previous year and is an increase from a revised $408,400 in May. 

The interest rate sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades. Policymakers already approved a 75-basis point rate increase in both June and July.  

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Following the rate hikes, the average rate on a 30-year fixed mortgage climbed to nearly 6% in June, though they've since moderated.

Pointing to existing and new home sales data, Roschelle noted that, overall, the housing market is "slowing down dramatically," but stressed there "is so much demand for housing that it’s not going to cause a crash."

FOX Business’ Megan Henney contributed to this report.