Shelter costs continued to drive inflation in October, as reported by the government. According to the Bureau of Labor Statistics, the index measuring shelter experienced a 0.3% increase in October, resulting in a 6.7% gain compared to the previous year. While the pace of growth slowed slightly in October, the shelter index contributed the most to the overall 0.2% monthly increase in core inflation, which excludes food and energy costs.
Investors in home builder stocks remained unfazed by this information, reflecting the broader market sentiment. In fact, two exchange-traded funds that track home builders and related companies experienced gains in morning trading.
It’s worth noting that the shelter category, which mainly consists of rent and rent-equivalents, tends to lag behind private measurements of asking rents. While government data indicates a continued rise in these costs, private data has shown a decrease in recent months.
ApartmentList has tracked year-over-year rent changes since March 2021, and these figures reached their peak at 18.2% before stabilizing in June. However, for the past four months, these measurements have fallen below the levels observed a year ago.
While asking rents serve as an indicator for future trends, it’s crucial to keep an eye on home prices as well. Although price increases for homes being sold are not directly factored into the Consumer Price Index (CPI), they can exert upward pressure on comparable rental costs for single-family homes. According to the National Association of Realtors, the median sale price for existing homes in September was $394,300, marking a 2.8% increase from the previous year.
The Bright Side of October’s Shelter Gains
Senior managing director at 22V Research, Gerard MacDonell, believes that October’s shelter gains have a silver lining. In a note written on Tuesday, he suggests that the strong rent figures may actually make the Consumer Price Index (CPI) more favorable. This is because it is expected that rent inflation will slow down in the future.
Potential Benefits for Home Buyers
The decline in the 10-year Treasury yield, which fell to 4.449% in morning trading, seems to indicate that mortgage rates could also fall further. Last week, mortgage rates measured by Freddie Mac experienced the largest decline in a year. This was attributed to a strong 10-year auction and economic data that was cooler-than-expected.
Positive Market Reaction
Investors responded positively to the overall Consumer Price Index reading. Home builder stocks saw a rise on Tuesday, likely due to the drop in the 10-year Treasury yield. The SPDR S&P Homebuilders ETF (ticker: XHB) and the iShares U.S. Home Construction ETF (ITB) both showed significant gains of 5.4% and 6%, respectively. These increases brought the ETFs within approximately 6% and 4% of their record closing highs.
The real estate sector as a whole also experienced positive growth. According to Dow Jones Market Data, the S&P Real Estate sector rose by 4.3% on Tuesday, marking its best day since November 2022. The Vanguard Real Estate ETF (VNQ), which includes various real estate investment trusts and real estate-related companies, saw an increase of about 4.9%.
In conclusion, despite concerns about rent inflation, the recent shelter gains have presented a favorable scenario for both home buyers and investors in the real estate industry.
