From ZeroHedge (HT: PC):
"The biggest source of inflation is shelter aka Real Estate. Real Estate inflation has been surging for years thanks to the Fed's specific policies aimed at boosted real estate property prices. It's likely that recent tightening will slow this inflation. The Fed created this part of the problem and is now, belatedly, addressing it."There are so many errors packed into such a short and seemingly irrefutable statement.
Shelter inflation is not "real estate" inflation. Shelter inflation is rent inflation. Rising rents certainly can make homes more valuable and increase the prices of homes. But, if we are talking about Fed policy and interest rates, then no. If home prices rise because of interest rate policies, it has no effect on rent inflation.
In fact, if home prices were rising because of low interest rates, then rent inflation would be falling, because it would induce more home buying and more supply. In fact, the persistence of rent inflation while housing starts struggle along at extremely low levels would be the first obvious fact to look for as a confirmation of failing supply. This would be a sign of, if anything, Fed policy that is too tight and rates that are too high.
Fed tightening will only cause rent inflation to decline if it tightens so strenuously that it triggers another crisis that causes major permanent re-adjustments in household spending. Households are already spending more of their incomes on rent than they ever have before, for less real shelter, so it remains to be seen whether households would be willing to adjust any more, in the aggregate. It could be that more tightening will cause more adjustments in other discretionary spending as households hunker down in the minimum real level of shelter consumption they are willing to accept.
Of course, owner-occupiers won't feel much of this directly. It will be mostly felt by renters.
And, why are housing starts so low, if home prices are so inflated? This is a pretty basic question that would need to be answered before the (seeming) entire country decides that homes are overpriced because of Fed policy. Somebody needs to send a memo to the homebuilders.
But, to even address that error, we have to address the error that near zero interest rates are a policy choice, as if we would be at 4% if the Fed had wanted to peg us there. Not to mention that the most significant policy decision of the past 20 years has been the series of Fed decisions that pulled the rug out from under the housing market from which it still hasn't recovered.
So, rent inflation has the opposite reaction to Fed policies that ZH thinks, which are actually the opposite policies that ZH thinks they are, which have pushed real estate prices in the opposite direction from what ZH thinks they did. Tightening will slow inflation in every category except the one ZH thinks it will. The Fed did create this problem (ZH got that one right) but the problem is the opposite of what ZH thinks it is, and thus the tightening is coming too soon, if anything, not belatedly.
Other than that, Zero Hedge made a trenchant observation. :-)