The latest Consumer Price Index (CPI) published this past week for the month of January showed pricing for shelter up 0.2% month-to-month, and it was up 2.2% for the year. Not all of the increase was due to the real estate recovery though. For instance, the real estate collapse almost immediately affected residential rental rates in an inflationary manner, because as homeownership diminished, shelter was still necessary. So, as demand for rentals increased, given limited supply, rental prices rose and they are still rising. The CPI report showed that rent and owner’s equivalent rent increased by 0.2% in January 2013. That’s good news for Apartment Investment & Management (NYSE: AIV) and peers but not for American renters.
Commercial Property Cull
The economic recession that followed the real estate collapse and financial sector crisis put pressure on commercial property leasing rates. But as the economy recovers, with accelerating GDP growth anticipated for this year and next by the Federal Reserve, commercial property rates should inflate in kind. Indeed, they have been and continue to appreciate.
With distressed housing supply dissipating and with demand spurred by low rates and lower home prices; plus aided by the support of population and economic growth, residential housing prices are also finally on the rise. Indexes of home prices produced by the FHFA and S&P Case Shiller each indicate an apparent appreciating trend for real estate prices. It’s an important change from recent years past, with extensive consequences.
Materials Cost Increase
As demand for new homes and for home improvement products increase, so does demand for construction materials and the retailers which provide them, including Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW). Building materials and supply makers like USG (NYSE: USG), Weyerhaeuser (NYSE: WY) and Fastenal (Nasdaq: FAST) should see raw materials costs increase but they are gaining more pricing power as well.
Higher Cost of Labor
The real estate collapse led to a massive purging of construction sector employment, with millions of laborers losing their jobs. Many of those former construction workers have moved on and found other work, and in some cases, careers. So as the sector recovers, a labor shortage has developed as confirmed to me by Toll Brothers (NYSE: TOL) executives earlier this month. Where supply does not meet demand, prices rise, and so labor costs for homebuilders should likewise be on the rise. All of these matters matter to homebuilders like Ryland Group (NYSE: RYL), PulteGroup (NYSE: PHM) and Hovnanian Enterprises (NYSE: HOV).
Peripheral Price Rise
Similarly, prices for the things that fill homes should gain support now. This means furniture makers and retailers and manufacturers of home items like Pier 1 Imports (NYSE: PIR), Ethan Allen Interiors (NYSE: ETH), Whirlpool (NYSE: WHR) and General Electric (NYSE: GE) should gain some pricing power as they see increasing demand.
Mortgage Rate Rise
Mortgage lenders are also benefiting from increasing demand for homes. Mortgage rates are on the rise despite the Fed’s best efforts to keep rates down through monetary policy and its asset purchase programs. We recently suggested that there is a lender shortage, due to the business fallout during the crisis and the regulatory rules established after the fact. Big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) are contending with hefty aggregate loan balances, while the two and peers Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM) and U.S. Bancorp (NYSE: USB) also deal with the low returns available to them. This is drawing smaller players back into the game, but perhaps not fast enough.
As you can see, demand for shelter is an important factor in the inflation equation. It has extensive reach and broad consequences. Price gains here are symptomatic of a recovering economy and asset class, but they also mark cost of living increases for American consumers nonetheless. Inflation threatens and housing is one sure factor that will fuel it.
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