Despite a series of positive economic indicators, including easing inflation, a strong stock market, rising wages, and plentiful job opportunities, many Americans are reluctant to celebrate. This sense of unease, often described as a “vibecession,” persists even as personal financial outlooks improve.
The main reason for this tempered optimism is the high cost of housing, which remains a significant burden for many.
The latest Consumer Price Index (CPI) report showed a 3.3% increase on an annual basis, indicating that the prices for everyday goods and services are, on average, 3.3% higher than a year ago. Some major retailers are even reducing prices in response to consumer resistance to high costs.
Focusing on the “supercore” CPI, which excludes volatile categories such as food, fuel, and housing, the increase is just 1.9% from a year ago. This figure aligns closely with central bank targets worldwide, suggesting a stable economic environment.
However, everyday expenses, particularly housing, cannot be overlooked.
Shelter costs, which include rent and an estimated cost of homeownership, have risen by 5.4% over the past year. While this is lower than the 8.2% peak in March of last year and an improvement from April, it remains significantly higher than the pre-pandemic average of 3.5%.
Jay Parsons, an economist and head of investment strategy at Madera Residential, described the situation as “an 18-wheeler riding its brakes down a mountain. We know where it’s headed, but it’s a slow descent.”
The CPI does not capture the cost of purchasing a home, which remains a major challenge. Federal Reserve Chair Jerome Powell acknowledged the complexity of the housing market, stating, “Ultimately, the best thing we can do for the housing market is to bring inflation down so we can bring rates down, so that the housing market continues to normalize.”
However, the road to normalization is fraught with obstacles. Housing supply remains low, mortgage rates have been around 7% for months, and home prices continue to hit record highs. These factors have created a market where moving or buying a home is unaffordable for many.
For those who do manage to purchase a home, the financial burden extends beyond the initial cost. A recent Bankrate study found that U.S. homeowners now spend an average of $18,100 annually on home-related expenses, including property taxes, insurance, maintenance, and energy. This represents a 26% increase from four years ago, when the average was $14,400.
There are some early signs that the housing market may be improving. Zillow’s latest market report shows an increase in sellers entering the market, although buyer enthusiasm has waned. Home sales in May were 6% lower than last year, which has helped increase housing inventory by 22% compared to last year’s near-record low levels. Despite this, inventory remains 34% below pre-pandemic levels, though this is the smallest deficit in over three years.
Zillow senior economist Orphe Divounguy noted, “Homeowners who may have put off listing their homes are done waiting.” However, inflation and high borrowing costs have discouraged first-time buyers, reducing competition for houses. “If these trends hold, we’re likely to see price growth flatten or tick down over the next year,” Divounguy predicted.
Nevertheless, Powell emphasized that it may take “years” for housing inflation to normalize. Douglas Duncan, senior vice president and chief economist for Fannie Mae, reiterated this, saying, “There’s not a silver bullet. Part of it is access to land near where people either want to live or must live based on their employment. There are many small-scale experiments, but no one has found a definitive solution yet.”
In summary, while the economy shows many signs of strength, the high cost of housing continues to overshadow these gains. As efforts to address housing affordability continue, achieving stability in the housing market remains essential for overall economic well-being.
