Economy for Rent Propelling Gains in U.S. Housing, Inflation

Builders and landlords are in for better times as more American households opt to live in apartments.

Housing starts rose 9.8 percent in June to a 1.17 million annualized rate as construction began on the most multifamily units since 1988, Commerce Department data showed Friday in Washington. An increase in consumer prices last month was driven in part by rising rents, according to Labor Department figures.

An improving job market is giving younger people the confidence to move out on their own, pushing rental vacancies to the lowest level in two decades, which will ensure construction and apartment costs keep increasing. The resulting boosts to economic growth and inflation are what the Federal Reserve needs to see to raise interest rates later this year.

“Demand has heated up for rental units and construction still has some room to catch up,” said Avery Shenfeld, chief economist at CIBC in Toronto and the best forecaster of housing starts over the past two years, according to figures compiled by Bloomberg. “Today’s data is still very much in line with the Fed raising rates in September. Housing is one of the beneficiaries of low interest rates and it’s clear there’s enough health in the homebuilding industry that it could tolerate slightly higher interest rates.”

The yield on Treasury securities was little changed as the increase in inflation was subdued enough to strengthen the Fed’s resolve to raise borrowing costs only gradually. The yield on the 10-year note, a benchmark for mortgage rates, was 2.35 percent at 1:05 p.m. in New York compared with 2.34 percent late Thursday.

Housing Starts

The level of housing starts last month was the second-highest since November 2007, trailing only April’s 1.19 million pace. The Commerce Department also revised up the May reading to

1.07 million from a previously reported 1.04 million.

The median estimate of 76 economists surveyed by Bloomberg was a 1.11 million rate in June.

Work began on 489,000 multifamily homes at an annual rate in June, up 29.4 percent from May and the most since April 1988. Three of four regions of the U.S. showed increases, indicating the pickup was broad-based.

Starts of single-family houses eased to a 685,000 rate from 691,000 a month earlier, the report showed.

While gains in construction of either type of home add to growth, economists such as Shenfeld pointed out multifamily projects tend to make smaller contributions.

Building Permits

Nonetheless, increases in applications for new projects, both single- and multifamily, indicated the entire market will continue to pick up. Total building permits rose 7.4 percent to a 1.34 million annualized rate, the highest since July 2007.

Rising demand for apartments also was evident in the inflation data.

The consumer-price index climbed 0.3 percent after rising

0.4 percent in May, according to the Labor Department. That matched the median forecast of 81 economists surveyed by Bloomberg. Costs over the past 12 months increased 0.1 percent, advancing for the first time this year.

Excluding food and fuel, the so-called core index climbed

0.2 percent in June after rising 0.1 percent the prior month. The index was up 1.8 percent from June 2014, after increasing

1.7 percent in the year through May.

About two-thirds of the increase in the core rate in June was caused by rising home-leasing costs. Rents of primary residences climbed 0.4 percent, the most since August 2013. They were up 3.5 percent over the past year, matching the biggest 12-month gain since late 2008.

Rents

A category designed to track the rental value of owner-occupied homes also rose 0.4 percent, the most since October

2006.

“We underbuilt multifamily for a decade-and-a-half, so there’s a lot of tightness in the rental market,” said Michael Gapen, the New York-based chief U.S. economist for Barclays Plc and a former Fed Board economist.

For inflation to reach the central bank’s 2 percent goal, price increases need to expand beyond rents, said Gapen.

“Over the forecast horizon of 2016 and beyond, you will need something else in order to help push inflation higher,” he said. Absent that, price increases will linger in the 1 percent to 2 percent range, said Gapen. “The Fed could declare victory on that front, but I think obviously they would be more comfortable with a clear trajectory that put it back at 2.”

Another report Friday showed American households were shaken this month by concerns that global risks will dim prospects for the U.S. economy.

Consumer Sentiment

The University of Michigan’s preliminary consumer sentiment index for July dropped to 93.3 from 96.1 in June. About one out of every eight individuals surveyed mentioned either the debt crisis in Greece, turmoil in China’s economy and stock market or bickering over President Barack Obama’s Trans-Pacific Partnership trade pact as reasons for being more unsettled, Richard Curtin, director of the Michigan Survey of Consumers, said in a conference call.

Even with the decline in sentiment, July marks the eighth straight month the Michigan gauge has been above 90, the longest stretch since a 17-month period ended in early 2005.