Trust This. Housing Drives Inflation

👋 Top of the day to you! A ⛈️ rain storm Wednesday evening had me walking to my car through three inches of water with trash bags rubber-band-strapped over my shoes. Here’s hoping our Central Florida ☔ monsoon season eases out the door sooner rather than later.

1. Big thing: Housing drives inflation

On Wednesday, the US Labor Department reported that inflation increased 9.1% over the last 12 months, the fastest increase in consumer prices since 1981.

Why it matters: This increase was much higher than expected. To cool it, the Fed will continue raising interest rates at a sharp clip for the foreseeable future, which in turn will continue increasing mortgage borrowing rates as well.

Core inflation, which strips out food and energy price increases, rose only at 5.9% which was a slower pace than in May. Airfare and hotel prices dropped, and inflation overall appears to be decreasing in July with gas prices dropping from their June highs.

By the numbers: Housing costs were a large contributor to the increase in inflation, rising 5.5% higher than last year and 0.7% since May. This is the fastest that housing costs had risen since 1990.

What they're saying: According to Inman, it’s going to get worse before it gets better. Housing (purchases as well as rents) inflation usually lags all other inflation by six to 12 months. Rapid rises in rents is only now starting to hit the inflation numbers, and the market could actually go into a negative feedback loop.

This means the Fed’s rate-raising attempts to cool inflation could instead increase housing inflation as more sellers pull listings from the market, scared to leave a home at a lower rate than a replacement they could buy. Further, home builders are feeling the pinch of higher rates on their buyers and their own acquisition and development lines of credit, causing them to pull back on building new inventory.

The bottom line: All of this exacerbates the housing shortage as demand continues to climb, simply pushing up home prices and rents rather than lowering them.

2. 2021’s Top 10 Orlando investor buyers

The Orlando Sentinel recently reported that the top 10 home buying firms in Central Florida were tied to firms in the single-family home rental business.

Institutional investors have at least partially contributed to the shortage of homes for sale as they snap up single-family homes and rent them to tenants instead.

Go deeper: We’ve written about this before, but the Sentinel’s in-depth research and review of public records puts a name to the companies responsible for the widespread purchases. In particular, they discovered that one company — Progress Residential, a subsidiary of Arizona-based private equity firm Pretium Partners — purchased 740 properties in one year alone.

The rest of the top 10 is a Who’s Who of private equity hedge funds and Wall Street big wigs: Main Street Renewal, Invitation Homes, FirstKey Homes, My Community Homes, Beacon Ridge Capital, and Tricon Residential

By the numbers: These 10 bought 3,496 homes or 12% of all the sales that year. Many of the purchases were from Zillow which decided to exit the home-buyer model last Fall. Zillow sold many of the homes in bulk to these top 10 institutional investors.

State of play: Many of these companies rose from the ashes of the Great Recession as they bought up swaths of REO properties from lenders that had ended up with the houses out of foreclosures. Since then, they’ve all continued to grow at a fast clip each year, expanding their market share between 27 and 60 percent a year.

Our thought bubble: When we first saw these institutional investors come into the market after the financial collapse of the mid-2000s, we expected that they would buckle under the weight of holding so many single-family rentals. That doesn’t look likely at all now.

3. All the news ….

4. Parting shot

This time of year, I’m reminded of when we lived in Asheville and would go to the Shindig on the Green on Pack Square in the late summer evenings. You could walk around and hear little groups of bluegrass musicians playing in corners here and there. If you’re in the area this weekend, I highly recommend it if you want to hear real bluegrass music, and see authentic mountain cloggers. Here’s a sample.

We hope you found this helpful — any feedback is appreciated and can be shared by hitting reply or using the feedback feature below.

Be on the lookout for our next issue! 👋