Recently released government data emphasized what we've known for at least a year: a nationwide housing shortage, not widespread price increases, is what's driving inflation.
Inflation last year was 3.1% – much lower than in 2021, but still high enough for the Federal Reserve keep interest rates high. However, unlike the inflation we saw shortly after the start of the pandemic, the most recent attack was driven overwhelmingly by the rising cost of what the Consumer Price Index classifies as “housing,” including rent actually paid and the estimated rent that could be charged. for owner-occupied homes.
Since the beginning of last year, most prices have increased very slowly or not at all. The price of goods (the tangible things we buy) stayed essentially the same, increasing just 0.1%. Food inflation, a source of post-pandemic pain for many households, was less than 3%. And other price categories actually fell: household energy prices fell by 2.4% and car prices fell by just over 1%. In total, in everything other than housing, inflation was only 1.5%, low enough that if housing prices had grown at historic rates, the Federal Reserve could have declared victory.
But housing costs have not risen at historic rates: Price growth in two years was sharper than at any time in the past four decades. This asymmetrical picture tells us a lot about who is most affected by inflation and how it should be addressed.
The enormous role of housing inflation means that homeowners and renters whose leases have not changed are experiencing inflation very differently than those who were most exposed to rising housing costs. In fact, rising housing costs are a double-edged sword, increasing the wealth of homeowners even as they punish many renters. Since the beginning of 2022, real estate wealth has added more than $2 trillion to homeowners' balance sheets.
This trend has important implications across generations. People under 35, with a homeownership rate about half that of those of retirement age, are much more likely to suffer from rising housing costs while missing out on the boom of resulting wealth. Retirees, with growing housing wealth and protection against inflation through Social Security and Medicare, are more likely to fare better.
The remedy for housing-fueled inflation is also different from standard responses to widespread price growth. The Federal Reserve's interest rate increases (which caused mortgage rates to rise at an unprecedented rate) might have been expected to slow home prices. But while potential homebuyers have pulled out of the market, residential listings were in free fall during the pandemic and have yet to recover. That means potential buyers face tight inventories and higher prices.
The only effective long-term response is, of course, to build and rehabilitate more homes, many more. America's housing crisis is a big problem that requires an equally big solution: Various estimates put the national shortfall between 1.5 million and 5.5 million units.
Legislation passed by the House in 2022 would have made significant progress by allocating about $40 billion to supply-increasing programs such as the Housing Trust Fund, Low Income Housing Tax Credit, and Partnerships Program block grants. of HOME Investment. Unfortunately, the bill failed in the Senate and is effectively dead at least until the next Congress.
In the absence of major legislation in Washington, state and federal policymakers have increasingly focused on incremental responses to the deficit. The Biden administration recently announced a series of reforms, including grants for low-income seniors and funds to help rehabilitate manufactured housing, that will add tens of thousands of new homes to the market. A series of bills passed in Sacramento in recent years will help accelerate new housing construction in California, where the shortfall of about 1 million units is nearly three times the state's next largest housing shortfall. But the data shows that we still need to do much more to facilitate and encourage construction to control housing costs.
Federal Reserve Chairman Jerome Powell and the Federal Open Market Committee have made it clear that they will do whatever is necessary to fight inflation. That is an admirable and responsible position. But Congress still has to help address our national housing deficit. If so, pandemic-era inflation may already be behind us.
Ben Harris is vice president and director of the Economic Studies Program at the Brookings Institution and was a long-time economic advisor to President Biden.
