Overview of US shelter inflation

Inflation has been one of the central talking points during 2021, and into 2022. What started as transitory inflation created by supply constraints, has proved to persist longer than expected initially. It continues to affect housing prices, which in turn pushes rents higher, increasing the cost of living for millions of families across the country.

Since the second quarter of 2020, shortly after the corona outbreak started, the median house sale price has increased ~33% to $428,700 as of the first quarter of 2022.

 

Source: FRED

This increase in house prices has also been reflected in rent price increases. Despite the policies taken, including the eviction moratorium, which caused a spike in evictions when it finally ended. Since 2021, the median rent has increased nearly 20%, and there seems to be no end in sight.

Source: Themreport

Shelter continues to be the biggest component of the CPI, representing about a third of the index, and also the main expense for most families. Despite the rent increases, this has not been fully reflected in the CPI numbers. In fact, the shelter component of the CPI has lagged the overall index.

The data shows that the increase in rent prices across Zillow listings has been higher than the current shelter inflation.

While house and rent price increases have not been fully priced into the CPI. This trend does not seem to stop here, as mortgage rates continue to increase driven by interest rate hikes. Although construction costs have also contributed to the increase in rent prices, they have started to decline, as a consequence of higher mortgage rates.

Is There a Link Between Inflation and Migration?

Perhaps one of the main drives of inflation, and in particular shelter inflation has been the migrants. But is this actually true? Could the inflow of new homebuyers explain the rapid increase in house and rent prices in certain areas of the country?

To understand whether there is a direct correlation between inflation and migration we need to analyze the following data points:

• Migration flow into Sun Belt metro areas
• Compare national average inflation with those regions
• Compare the average housing and rent prices with the Sun Belt metro areas

Migration inflow into Sun Belt metro areas

If we look closely at the cities with the largest population growth over the recent past, we see a correlation between them – they are all located in the Sun Belt region. In fact, the top 12 cities with the highest population growth are all located in Texas, Florida, Arizona, and Tennessee.

Florida and Texas in particular were the most popular states (around a 1% increase in the population of both states in 2021). A combination of attractive corporate conditions has also led several companies and their employees to move there.

This combined with the fact that certain cities in those states are seeing population growth above 5%, can explain the higher demand for housing, and therefore an increase in housing and rent prices in the area.

Compare national average inflation with those regions

The national average inflation measured by the CPI has been higher in both Texas and Florida. For example, Tampa is the city with the highest inflation rate in the country, at 11.3%, which is 30% higher than the average inflation in the US, followed closely by Phoenix and Atlanta.

This shows that the migration to these states seems to be having an effect on inflation.

Comparing the national average house and rent prices

Finally, when comparing the average increase in house and rent prices nationally with Sun Belt states we also see data that confirms that migration is driving higher inflation.

Out of the top 10 cities in the country with the highest rent increases, only New York was not located in the Sun Belt region. The same trend can be identified when analyzing the states and metro areas with the highest house price increases. Phoenix, Atlanta, Tampa, and Miami

Conclusion

Real estate investors have also been paying close attention to this, and that explains why Sun Belt Metros has slowly become the most attractive multifamily real estate markets in the country. In fact, in the first quarter of 2022 alone, the number of multifamily property transactions doubled compared to 2019.

This shows how the demand and supply in the multifamily real estate market have increased, and it is the most liquid in the country. Dallas, Phoenix, and Atlanta remain the most liquid multifamily real estate markets.

Migration in certain states has been a key contributor to inflation, and in particular in the rise of housing and rent prices. Sun Belt cities remain one of the most attractive destinations, and it seems like this trend will continue over the following years.

Three Factors Contributing To Fewer People In The Workforce

A piece Yaron wrote for Forbes Real Estate Council about The United States labor force: “As of the beginning of 2022, there are around three million fewer people employed than before the pandemic. There is an increase in people quitting their jobs, (also known as the “Great Resignation”).

Read more about “Factors contributing to fewer people in the workforce“.

Real-Estate Predictions for 2022

A piece Yaron wrote for Forbes Real Estate Council about the snowball effect of rent inflation: “In 2021, the real estate market saw a historic rise in home and rent prices throughout the U.S., leading many to ask if rent prices will continue to skyrocket in 2022. As I argue here, rent must go up!”

Read more about “the snowball effect of rent inflation“.

Accelerating Technology Adoption

The COVID-19 pandemic and resulting economic shutdown have substantially increased technology adoption across all industries. A McKinsey survey from Oct 2020 finds that companies’ responses to this crisis have sped up the adoption of digital technologies by several years—and that many of these changes could be here for the long haul.

According to the McKinsey Global Survey of executives, their companies have accelerated the digitalization of customer and supply-chain interactions, as well as their internal operations, by three to four years. Furthermore, the share of digital or digitally enabled products in their portfolios has been expedited by an unprecedented seven years. Nearly all respondents agreed that their companies have instituted at least temporary solutions to meet many of the new demands on them, and much more quickly than they had thought possible before the crisis. In addition, respondents expect most of these changes to be long-lasting and are already making the kinds of investments that all but ensure they will stick. When asked about the impact of the pandemic, executives say that funding for digital initiatives has increased above all else—more than increases in costs, the number of people in technology roles, and the number of customers.

Moving toward online channels

Consumers have moved dramatically toward online channels during the pandemic, and companies and industries have responded in turn. The survey results confirm the rapid shift toward interacting with customers through digital channels. They also show that adoption rates are years ahead of where they were when previous surveys were conducted. Respondents are now three times likelier to say that at least 80% of their customer interactions are digital.

The Difference Between Sectors

However, the results also suggest that rates for developing digital products during the pandemic differ across sectors. Given the timeframes for making manufacturing changes, the differences, are more apparent between sectors with and without physical products than between B2B and B2C companies. For example, respondents in consumer packaged goods (CPG) and automotive and assembly report relatively low levels of change in their digital product portfolios. By contrast, the reported increases are much more significant in healthcare and pharma, financial services, and professional services, where executives report a jump nearly twice as substantial as those reported by CPG companies.

The customer-facing elements of organizational operating models are not the only ones that have been affected. Respondents report similar accelerations in the digitalization of their core internal operations (back office, production, and R&D processes, among others) and supply chain interactions. Unlike customer-facing changes, this rate of adoption is consistent across regions.

The speed with which respondents say their companies have responded to a range of COVID-19-related changes is remarkable, even more so than digitalization processes. In the case of remote working, respondents say their companies moved 40 times more quickly than they thought possible before the pandemic. Previously, respondents say it would have taken more than a year to implement the level of remote working that took place during the crisis. In actuality, it took an average of 11 days to implement a workable solution, and nearly all companies introduced workable solutions within a few months at most.

Respondents across sectors and geographies are most likely to report a significant increase in remote working, changing customer needs (a switch to offerings that reflect new health and hygiene sensitivities), and customer preferences for remote interactions. Respondents reporting significant changes in these areas and increasing cloud migration are more than twice as likely to believe that these shifts will remain after the crisis than to expect a return to pre-crisis norms. Both remote working and cloud migration are viewed as more cost-effective than previous practices, while investments in data security and artificial intelligence are most often identified as helping to position organizations better than before the crisis.

The extent of technology’s differentiating role in this crisis is stark. At the organizations that experimented with new digital technologies during the pandemic, and among those that invested more capital expenditure in digital technology than their peers, executives are twice as likely to report outsize revenue growth.

The results also indicate that, along with the multiyear digital acceleration, the crisis has brought about a sea change in executive mindsets on the role of technology in business. In McKinsey’s 2017 survey, nearly half of executives ranked cost savings among the most important priorities for their digital strategies. Now, only 10% view technology in the same way; in fact, more than half say they are investing in technology to pursue a competitive advantage or refocusing their entire business around digital technologies. The report’s authors concluded: “The notion of a tipping point for technology adoption or digital disruption isn’t new, but the survey data suggest that the COVID-19 crisis is a tipping point of historic proportions—and that more changes will be required as the economic and human situation evolves.”

Edward Yardeni predicted, “In my Roaring 2020s scenario, technological innovations will boost productivity-led growth and real pay per worker while keeping a lid on inflation.” Digitalization is the key to modernization. This is why 85% of companies accelerated their digital transformation programs last year.

Technology leading to improved productivity via platforms like Instawork, ShiftPixy, Shyft, and Jobletics can also help to fill short-term workforce gaps. The Instawork network, for example, has more than 1 million workers across the U.S., and the number of available shifts on its platform has grown 8x in less than two years, with professionals finding work in less than 24 hours.

The pandemic, in conjunction with a difficult insurance market, has pushed contractors to reevaluate their old ways of doing business. “The pandemic forced contractors to do their work differently, and I think that was an improvement,” Gary Kaplan, president of construction for AXA XL, said. “They brought in technology to automate some stuff that was pretty clunky.”

According to Kaplan, the adoption of technology by construction firms tended to be a lower priority before the pandemic. But COVID forced the sector to bring in newer, more innovative tools to improve safety. Michael Teng, assistant vice president of regional pricing, products, and underwriting at Sentry Insurance, agreed that the pandemic has spotlighted workplace safety. That includes the use of telemedicine, which picked up significantly in construction: “We began to see a lot of contractors starting to utilize electronic badging.” The sector also improved processes for workers entering job sites and increased the use of wearable technology tools, such as monitors.

Houses currently appear to be in short supply, driving higher rent growth. This condition seems likely to endure due to changes in resident lifestyles, longer construction times, and the substantial disincentive presented in the form of rapidly rising construction prices.

High material costs and labor shortages affected construction activity in the past 12 months. As a result, current multifamily units under construction are considerably lower than pre-pandemic in the vast majority of US metros. There are about 3,000 units under construction in Jacksonville, with the metro growing by more than 20,000 residents yearly.

Rising Costs

The global supply chain gridlock may not be cleared until well into 2022. Shipping rates continue to soar, delivery delays are up significantly, and inventories are in steady decline. Container freight rates, for example, have increased more than 400% over pre-pandemic levels.

Delivery delays According to the Institute for Supply Management’s latest data, delivery times have also slowed, with manufacturing supplier delivery times roughly 30% slower than they were a year ago.

Hiring Logistical Difficulties

Federal Reserve Chairman Jerome Powell blamed additional factors for the shortages, including skills mismatches and geographic differences.

Hiring new employees is a time-consuming process. There are limits on how fast employers can hire, and these are aggravated by the high level of people quitting their jobs for other opportunities lately.

Skills mismatches are another solid contributor to rising costs and slower economic recovery, particularly within the real estate industry. Kevin Liang, vice president at Argo Construction, commented that builders have not been able to keep up with demand due to skilled labor shortfalls. “That raises concerns about the quality of work being done on construction sites,” Liang said. “And the current supply chain issues, everything from material shortages to scarce shipping containers, to a shortage of truckers, everything in that supply chain has a significant effect on construction.”

Unskilled workers are being mentioned as the number one cause for subcontractor default insurance claims. Gary Kaplan, president of construction for AXA XL, noted that the sector’s labor shortage concerns are not new, but the shortfall effects are beginning to be reflected in insurance claims.

Florida’s economy is performing robustly. Job demand is high, leading companies & Americans are moving to Florida daily. With all the uncertainty in the global market, now is a great time to invest in Florida real estate.

Market Insights

As the economy recovers momentum following its pandemic-induced slowdown, attention has turned to speculation about the soaring inflation rate in the United States. However, expert opinions differ on whether the current high inflation is transitory or will have far longer-lasting effects.

Although the Federal Reserve has referred to the current 5% inflation as “transitory,” it has shied away from defining just how transitory the situation might be. Notes reveal that the Fed generally expects to see elevated inflation for the remainder of the year, with it moderating as we enter 2022. However not all Fed policymakers are as confident, with some anticipating that inflation may linger further into 2022.

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