The Federal Reserve may have a housing problem. At the very least, it has a housing conundrum.

Overall inflation has declined significantly over the past year. But housing has proven to be a persistent – ​​and surprising – exception. According to the Ministry of Labor, shelter costs in January were 6 percent higher than a year earlier and were rising faster on a monthly basis than in December. That acceleration was a major reason for the increase in overall consumer prices last month.

Persistent housing inflation poses a problem for Fed officials as they consider when to roll back rates. Housing is by far the largest monthly expense for most families, meaning it weighs heavily on inflation calculations. Unless house prices decline, it will be difficult for inflation as a whole to return sustainably to the central bank’s target of 2 percent.

“If you want to know where inflation is going, you have to know where housing inflation is going,” said Mark Franceski, president of Zelman & Associates, a housing research firm. Housing inflation, he added, “is not slowing at the pace that we expected or that anyone else expected.”

These expectations were based on private sector data from real estate websites such as Zillow and Apartment List and other private companies, which shows that rents have barely risen recently and have even fallen outright in some markets.

For homebuyers, the combination of rising prices and high interest rates has made housing increasingly unaffordable. In contrast, many existing homeowners are partially insulated from rising prices because they have fixed-rate mortgages where payments do not change from month to month.

However, house prices and mortgage rates are not directly reflected in the inflation data. That’s because buying a home is an investment, not just a consumer purchase like groceries. Instead, the inflation data is based on rental prices. And with private data showing rents moderating, economists have looked for the slowdown to show up in government data as well.

Federal Reserve officials have largely dismissed housing inflation for much of the past year, believing that the official numbers were simply slow to catch up with the cooling trend emerging from the private data. Instead, they focused on shelter-in-place measures, an approach they said better reflected underlying trends.

But as the differences persist, some economists inside and outside the Fed have begun to question these assumptions. Economists at Goldman Sachs recently raised their forecast for housing inflation this year, citing rising rents for single-family homes.

“Clearly something is happening that we don’t understand yet,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in a recent interview. “They ask me, ‘What are you looking at?’ I would say, ‘I’m looking at housing, because that’s still the strange thing.’”

Lagging data

The persistent nature of housing inflation is not a total mystery. Economists knew it would take some time for the moderation in rents reflected in the private sector data to make its way into the Labor Department’s official consumer price index.

There are two reasons for that delay. The first is of a technical nature: the government data is based on a monthly survey of thousands of rental properties. However, a given unit is only surveyed once every six months. So if an apartment is inspected in January and the rent goes up in February, that increase won’t show up in the data until the apartment is inspected again in July. This causes government data to lag behind conditions, especially during periods of rapid change.

The second reason is conceptual. Most private indexes only include rental properties when new tenants are added. But the government wants to absorb housing costs for all tenants. Because most leases last a year or more, and because those who renew their leases often receive a discount compared to those renting on the open market, government data will generally adjust more gradually than private indexes.

Public and private data should eventually converge. But it is not clear how long that process will take. For example, the rapid increase in rental prices in 2021 and 2022 caused many people to stay put rather than enter the red-hot rental market. This may, among other things, have meant that it took longer than normal for market rents to filter through to government data.

There are signs that a slowdown is coming. Rents have risen less than 5 percent annually over the past three months, after peaking at nearly 10 percent in 2022. Private data sources disagree on how much more rental inflation needs to decline, but they agree the trend should Get on.

“For the most part, they’re all saying the same thing, which is that rental inflation has come down significantly,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, an economic research firm.

Houses versus apartments

While rental inflation may finally be moderating, the government has not tracked costs for homeowners; according to last month’s data, it has actually accelerated. And because more Americans own their homes than rent, owner-occupied homes dominate the shelter component of the consumer price index.

The costs that most people associate with homeownership – mortgage payments, homeowners insurance, maintenance and repairs – are not directly included in the inflation measures.

Instead, the government measures housing inflation for owners by assessing how much it would cost to rent a similar home, a concept known as owners’ equivalent rent. (The idea is that this measures the value of the ‘service’ associated with offering a home, as opposed to the investment gain from owning it.)

The rental and ownership metrics tend to move together because they are based on the same underlying data: the survey of thousands of rental units. But to calculate ownership figures, the Ministry of Labor gives greater weight to homes that are comparable to owner-occupied homes. This means that if different housing types behave differently, the two measures may differ.

That could be what’s happening now, some economists say. The apartment construction boom of recent years has helped drive down rental prices in many cities. However, single-family homes remain scarce just as millions of millennials are reaching the stage where they want more space. That drives up house prices for both buyers and renters. And because most homeowners live in single-family homes, single-family homes play an outsized role in calculating the owners’ equivalent rent.

“There is more heat behind single-family homes, and there are very good arguments for why that heat will continue,” said Skylar Olsen, chief economist at Zillow.

A fluke, or something more?

Other economists doubt whether January’s rise in inflation is the start of a more sustainable trend. Rents for single-family homes have been higher than apartments for some time, but only recently has inflation for owners and renters diverged. That suggests the January data was a fluke, argued Omair Sharif, founder of Inflation Insights, an economic research firm.

“The month-to-month things in general can be choppy,” Mr. Sharif said. The good news in the report, he says, is that rental growth is finally starting to cool, making him more confident that the long-awaited slowdown will be reflected in the official figures.

However, that conclusion is far from certain. Before the pandemic, different parts of the housing market told generally consistent stories: Apartment rents, for example, were rising at about the same pace as single-family homes.

But the pandemic has destroyed that balance, causing rents to rise in some places and fall in others, disrupting the relationships between the different measures. That makes it difficult to have confidence in when official data will cool, or to what extent — which could make the Fed more cautious as it considers cutting rates, said Sarah House, a senior economist at Wells Fargo.

“Right now, they’re still assuming there’s still a lot of disinflation in the pipeline, but it will keep them wary of their optimism,” she said, referring to Fed officials. “They need to think about where the shelter will actually end up and how long it will take to get there.”

Spending time at home had become unbearable for Troy Mongillo and his girlfriend Amanda Pabon. Construction noise was constant, utilities were often shut off, and the insulation beneath their apartment was removed just before winter when the new owners of their building in Beacon, NY, converted the vacant retail space downstairs into a trendy bar. That's why they decided to move.

But the couple soon discovered what has become a reality in Beacon and the rest of the Hudson Valley, immediately north of New York City: affordable rental housing was hard to find. They were shocked by how few apartments were within their budget and how much landlords were demanding from them just to apply.

“I started to feel like there was no end in sight,” Mr. Mongillo said of the weeks they spent looking for a new home. “It felt very bleak.”

A growing housing crisis has gripped New York City and urban areas across the country, fueled by the rising cost of homeownership, rising rents and limited housing inventory. Now some places long considered more affordable are struggling with the same factors, as well as an influx of new pandemic-era residents and a boom in the number of homes being bought as second homes or listed on short-term rental platforms – making them increasingly out of reach become for tenants.

The challenges are acute in parts of the Hudson Valley, where fair market rents (a value calculated annually by the federal Department of Housing and Urban Development to gauge housing markets) have risen by as much as 45 percent in some places since 2019, said A report published last year by Hudson Valley Pattern for Progress, a non-profit organization. For many in the region, rents have risen much faster than wages, where lower-income workers have seen their wages stagnate or even fall, the report said.

Buying a home has become more difficult, pushing more people into the rental market, said Adam Bosch, the group's president and CEO. That has pushed rents “higher and higher,” he said.

Jonathan Bix, the executive director of For the Many, a nonprofit that has led campaigns calling for housing reform at the state and local level in New York, said the Hudson Valley “has seen one of the sharpest increases in has seen housing costs anywhere in the state. In recent years.”

“People are paying completely unsustainable amounts of their income on housing,” he added.

Faced with an ever-deteriorating situation and unwilling to wait for lawmakers in Albany to address the crisis in a substantive way, several communities in the Hudson Valley have tried to take matters into their own hands by some of the most aggressive changes in housing policy in the state.

In Newburgh, a small city in Orange County where about 70 percent of people rent their homes, public officials have been battling the effects of gentrification and limited housing stock for years. In December, an investigation conducted by the city found that there was a vacancy rate Below five percent, Newburgh became the third community in the Hudson Valley and the state to declare a “housing emergency” and opt for rent stabilization for many older buildings after Kingston And Nyack. The move has temporarily frozen rents for more than 700 households while officials work to form a rent guidelines council to vote on annual rent adjustments.

Newburgh, Poughkeepsie and Kingston, as well as Albany, just north of the Hudson Valley, have passed for cause eviction laws that protect tenants from drastic rent increases and establish their right to renew their leases. Numerous other towns and villages in the region, including Woodstock, Saugerties and New Paltz, have adopted strict rules for short-term rentals.

“We've been forced to be creative,” said Mike Neppl, spokesman for the city of Newburgh. “In the absence of federal policy and in the absence of state policy, local leadership really matters.”

But local officials have faced an uphill battle. Newburgh's good cause eviction law was struck down in court after landlords filed suits to stop it, like those in Kingston and Albany. Mr. Neppl said he expected landlords would also challenge the city's rent control measures. like they did in Kingston.

Tackling the state's housing crisis was one of Governor Kathy Hochul's top priorities in 2023, and the governor, a Democrat, proposed ambitious legislation aimed at boosting housing construction and protecting renters, but state lawmakers were unable to ultimately unable to agree on how to approach the problem. . The chance that a major housing deal will be closed this year is uncertain.

Senators Robert Rolison, a Republican, and James Skoufis, a Democrat, who represent the mid-Hudson Valley, said they were optimistic that lawmakers in Albany would succeed in taking action on the housing crisis this year. They said they want to explore ways to reward high-density housing across the state, and have expressed support for certain tenant protections. Both have been hesitant to support statewide eviction legislation for charities.

“Housing is a very sensitive issue. It's like a Jenga tower: you pull out one block and the whole thing starts shaking,” Mr Skoufis said. “But we have to find a way to thread this needle.”

Many people recently looking for housing in the Hudson Valley said they struggled for weeks or months to find a place to live.

Katie Salmonson, 26, said she and her partner spent more than six months last year looking for a new home in Ulster County after their landlord told them he was selling the house in Ellenville, where they paid $900 a month to live in a first house. ground floor apartment with their son. Every day, Ms. Salmonson checked Facebook Marketplace, Zillow and Hotpads, she said. She even drove around looking for “for rent” signs.

“There was just nothing available, whether we could afford it or not,” said Ms. Salmonson, who works as a student retention and Title IX coordinator at a community college.

Although many homes in the area appeared empty, there were almost no homes to be found, Ms. Salmonson said, making her wonder if fewer property owners were choosing to rent to full-time residents.

People have long used Airbnb and other platforms to rent out cozy cottages or off-the-grid cabins in the rural region, but locals, government officials and others studying housing in the area say the number of short-term rentals appears to have skyrocketed . during the past years. In June 2022, for example there were 2,587 short-term rentals available in Ulster Countymore than anywhere else in the Hudson Valley, according to a check by the provincial controller, and they made up 12 percent of the county's rental stock. Such listings accounted for 45 percent of rental inventory in Greene County, according to the audit. (An Airbnb spokesperson declined to provide detailed company data on short-term rental properties in the region, but disputed that any increase in supply had significantly affected the availability of affordable housing.)

Ms Salmonson said she and her partner, who were already living paycheck to paycheck, eventually ran out of options and had to give up their budget. In the fall, they moved to a small two-bedroom trailer in nearby Accord, where rent is $2,000 a month, she said.

“I just needed a roof over my child's head,” Ms Salmonson said. “It just makes me cry.”

Mr. Mongillo, 41, and Ms. Pabon, 31, faced a different set of challenges. Neither of them drive, which limited the neighborhoods they could live in, and many landlords objected to their 40-pound German Shepherd mix, Eddy. Even when they found available rental properties within their $2,000 budget, they were told they didn't qualify because they didn't have $4,000 in the bank.

“We have sacrificed a lot. We have uprooted our lives and even shelved our commitment,” said Ms. Pabon, a project manager at a solar energy contractor. “It really made us aware of how close we were to homelessness.”

Early last year, Ms. Pabon and Mr. Mongillo, a bartender, moved into a new apartment in Poughkeepsie, which they secured after a sympathetic landlord lowered the asking rent to the same amount they had paid in Beacon.

Ms Pabon said she cried with relief when they were approved: “It seemed too good to be true.”

After the couple moved, their former apartment was renovated by the new owners. In January, the 900-square-foot apartment was put up for sale for $2,800 a month — $1,100 more than Ms. Pabon and Mr. Mongillo had paid to live there.

Potential tenants should be prepared to hear music from the bar below, the listing on broker.com warned. In return, they would live in “one of the coolest NYC-style apartments in Beacon.”

Emily Schildt opened last March Pop-up grocery store on the corner of Bleecker Street in the West Village, selling artfully packaged condiments, drinks and other products made by small, emerging brands in a pay-to-play business model.

Customers can purchase artisanal hot sauces or zucchini chips from brands such as Peepal people And From Van who pay a fee to be on the shelves. Normally 150 to 200 brands are on display at a time, with some being replaced quarterly.

“If we were to rely solely on product sales, we would have to sell at a much higher volume,” Ms. Schildt said. “That's just impossible when you're talking about a store that consists of completely unknown goods.”

Rents for retail space in New York continued to rise last year, making it harder for independent businesses to survive, according to real estate services company CBRE. A 270-square-foot space in the West Village, an affluent Manhattan neighborhood, was recently on the market for $5,000 a month. But some ambitious entrepreneurs are experimenting with business models such as charging shelf fees or selling at wholesale prices to make ends meet.

“You have to get creative or you have to leave New York,” Ms. Schildt said.

Retail is being reconfigured to meet the values ​​of the new customer, says Thomaï Serdari, who teaches marketing at the NYU Stern School of Business. “Innovation comes from those who, out of necessity, have updated their business models,” she said.

But independent retailers face challenges, including high operating costs and finding a model that works.

“Technology is evolving, our mobile phones are evolving and physical machines are evolving,” says Ani Sanyal, who co-founded the company with his brother Ayan. Calcutta Chai Co., which sells products online and at two retail locations in downtown Manhattan.

Their business sells hot chai, Indian street food such as samosas, seasonal chai soft serve ice cream, along with bags of their chai blends and merchandise. Visitor traffic is stable at both locations, Ani Sanyal says, but the company's e-commerce business accounts for 75 to 80 percent of sales.

Kolkata Chai Co. also sells chai concentrate wholesale to Equinox, Juice Press and Boba Guys. The company has collaborated with brands like Transcendence coffeecollaborated with celebrities like Hasan Minhaj, all of which were posted on their social media feeds.

Using an omnichannel approach – e-commerce, wholesale and in-store – the brothers believe they can expose a wide range of people to their chai and create lifelong customers. “Since chai is a product that has been bastardized and misrepresented in this country for so long, it was very important for us to be able to have the true experience of our culture,” Ani Sanyal said.

Dolce Brooklyn sells gelato and ice cream from a storefront in Brooklyn's Cobble Hill neighborhood, but it's the company's wholesale business, which sells to high-end restaurants, some with two Michelin stars, that makes a profit. “You have to find different revenue channels,” says company owner Pierre Alexandre.

Rachel Krupa's omnichannel approach for her business, the Goods Market, involves assembling and distributing snacks in hotels, coffee shops and corporate pantries. In her minimalist store in SoHo, one of three locations, she sells packaged snacks from 200 brands, mostly emerging producers, such as garlic chili chips made by From mom Teava company in Oakland, California.

The Goods Mart was one of Mama Teav's first accounts when it started two years ago, and today Mama Teav products are available in 420 stores across the United States. “As a small maker, a new brand, we're not going to jump into Whole Foods,” said Christina Teav-Liu, founder of Mama Teav's.

Ms Krupa said she wouldn't be able to showcase brands like Mama Teav if she had landlords who were just trying to make money. Her first landlord, Bret Trenkmann, saw value in her mission and gave her a fair rent in SoHo, as did another landlord, Tishman Speyer, at her second location in Rockefeller Center.

Consumers, especially tourists, want authentic experiences they can't get at home, said Ms. Krupa, who also runs a PR firm, Krupa Consulting, which works with packaged food and wellness brands. “You're not going to say, 'Oh my God, I went skating at Rock Center — and I ate at Chili's,'” she said.

Landlords play an important role in the growth and survival of independent businesses, says Stacy Mitchell, co-executive director of the Institute for Local Self-Reliance, a nonprofit advocate for independent businesses. National chains may be a safer financial choice compared to an independent, but leasing to them is short-sighted, Ms. Mitchell says.

And it can be good for landlords to give small business owners a break. “The quality of businesses at street level affects the rents they can get for the upper floors, whether that be offices or residential,” she said.

The United States is undergoing a cultural shift in retail, says Syama Bunten, the founder of Scaling Retail, a San Francisco consulting firm. The direct-to-consumer model, pioneered by companies like Dollar Shave Club and Stitch Fix, was an innovative approach years ago, but has now reached saturation.

The new phase of shopping falls into two main categories: cheap and convenient on Amazon and with a sense of connection in physical stores.

Another way for independent owners to build business is through connection and community, often through in-store events, creating a vibrant street life, foot traffic and a gathering of like-minded people. A bus shelter advertisement can increase brand visibility, Ms. Bunten said, but creating events and spaces for customers creates a much stronger emotional connection.

“It may not be that 100 percent of visitors become customers,” she said, “but you have a 100 percent chance that your brand will have a much more lasting effect on someone's mind than a traditional advertising piece.”

Despite their success, some small retailers wonder if it's worth it. Many of them have poured their savings into their businesses and raised additional money through institutional and angel investors, not to mention friends and family. They use sustainable business models and constantly post on social media. Yet the costs of renting and creating a space remain a barrier.

“Something has to change,” says Ms. Schildt of Pop Up Grocer, who spent eighteen months looking for the right storefront.

If city officials and landlords don't realize that there are unaffordable costs around rent for independent retailers, “the city is going to lose its color,” says Ani Sanyal of Kolkata Chai Co. to New York.”

In 1974, Ahmad and Ann Shirazi moved into a rent-stabilized apartment on Manhattan’s Upper West Side, though the rent felt high for two bedrooms at $275 a month.

The Shirazis hoped to have children and thought their stay would be temporary. Nearly 50 years later, they’re still here, having raised two kids in a space they made work because it was affordable.

The story of the Shirazis — Ahmad, 84, a retired film editor who worked on the films “Scarface” and “The Bonfire of the Vanities” and Ann, 78, who worked as an illustrator for department stores such as Henri Bendel, reflects the experience of many of the city’s approximately two million rent-regulated tenants, nearly a quarter of the city’s total population.

As New York City became one of the most expensive places in the country, condos with regulated rents and guaranteed lease renewals offered respite to the working and middle class: The Shirazis now pay $1,025 a month, while a comparable unit in their building, which has not stabilized , renting for over $5,600.

As of Wednesday, the city’s huge inventory of rent-regulated housing, which has become one of New York’s main sources of low-cost housing, is about to get a little more expensive. A panel in New York City plans to raise rents in the city’s one million rent-stabilized apartments for a second straight year, citing high inflation and rising costs for property owners.

Last month, the panel, known as the Rent Guidelines Board, supported one-year lease increases of between 2 and 5 percent and two-year lease increases of between 4 and 7 percent, in a tentative vote.

It would be the second time during Mayor Eric Adams’s term — who nominates members of the panel and expresses sympathy for the problems landlords face — that the Rent Guidelines Board would allow stabilized rents to rise. Last year, the panel voted to increase rents for one-year leases by 3.25 percent in rent-stabilized homes and for two-year leases by 5 percent.

The Shirazis, who earn about $4,500 a month in retirement benefits, will find a way to stay afloat, they said. She and several other renters in the city — including higher income earners, retirees who have lived in their apartments for decades and newcomers — said incremental increases helped them find stability in New York City’s otherwise chaotic and unforgiving housing market.

But many also said the moment also reflects something deeper: how people of modest means are finding it increasingly difficult to live in New York City.

As expensive as it is to live in New York, no other U.S. city has such a comprehensive rent regulation system: More than a million apartments — half of the rental market and nearly 30 percent of all New York City homes — are governed by a system started in 1969.

The majority of rent-stabilized housing is in buildings built before 1974. For years, numbers fell as landlords left the program and took more income from higher rents.

However, since 2017, the total number has grown, according to the newspaper a census of units registered with the city and stateespecially as many new units and rehabilitated units were rent stabilized in exchange for tax breaks or subsidies.

While many of the newer units rent at a higher rate and there are no income restrictions associated with rent stabilization, the system mostly benefits those on lower incomes. According to a 2021 city survey, median household income in rent-stabilized apartments was $47,000, compared to nearly $63,000 in private, unregulated units. The median rent in stabilized apartments was $1,400, compared with $1,825 in private, unregulated apartments, according to the study.

The city’s “economic diversity is based on rent stabilization,” said Samuel Stein, a housing policy analyst with the Community Service Society, a nonprofit advocacy for lower-income New Yorkers.

But now the future of the program is less clear.

In the wake of the rental laws passed by leftist state politicians in 2019, property owners say they feel beleaguered and unable to make renting stabilized apartments financially viable. A group of New York City landlords has petitioned the U.S. Supreme Court to overturn the regulations, a case that has drawn the attention of several business groups, including the U.S. Chamber of Commerce, who are calling for rent controls to be lifted across the country. be withdrawn or relaxed. .

Michael Tobman, the director of membership and communications for the Rent Stabilization Association, an industry association, said the system forces private owners to provide a public benefit.

“All they have is rising costs, and this piece, Rent Guidelines Board increases — that’s badly needed,” he said.

The mayor has defended the panel’s approach as a way to protect landlords, at times noting that he is a petty landlord himself, even though he has called on the panel to stay away from the highest elevations.

“We just can’t put tenants in a position where they can’t pay rent,” he said last month.

But many landlords of rent stabilized buildings are large companies. They include developers such as Cammeby’s, Lefrak, L&M Development, each of which has several thousand rent-stabilized units in their portfolio, in addition to market-compliant units. The companies declined or could not be reached for comment.

John A. Crotty, a founding member of the Workforce Housing Group, which has about 1,500 rent-stabilized homes in its portfolio, said increases were warranted because during the tenure of the previous mayor, Bill de Blasio, the panel largely rejected large increases. landlords in a difficult position.

“If you fall below the real cost limit, and then you have a period of hyperinflation, how is this good?” he said. “No matter how great Adams’ increase, it won’t be enough.”

Peter Madden, the executive director of Westbeth Artists Housing, which has approximately 383 West Village condos, the vast majority of which are rent-stabilized, acknowledged the pressures property owners face.

But he also said rent stabilization is the “biggest, most affordable housing program the city has.”

In Westbeth, which also receives some grants from the city, rents for stabilized homes range from less than $1,000 to $2,300 for a three-bedroom home.

“Without rent stabilization, I don’t know how people would do,” Mr Madden said.

For some renters, rent stabilization is a lifeline, especially as the city experiences one of the most brutal rental landscapes in recent memory during a recovery from the worst of the pandemic.

The 2021 survey found that one-third of New York City renters spend more than half of their income on rent. For them, the impending hikes will lead to difficult choices about where else to cut spending.

“A rent increase this year would be about $80 a month more for me,” said Chen Ren Ping, 65, who shares a rent-stabilized apartment in Chinatown where he has lived since 2004. $80, we’d eat better, our lives would be better, we’d have a better quality of life.

Mr. Chen said he earns about $794 a month in Social Security payments. But he said his half of the rent for the two-bedroom apartment is $800, so he does neighborhood repairs to supplement his income.

Ann Shirazi said she was not happy about the upcoming raise for her own household. She is also concerned about the future of the city.

“It was a wonderful place to raise our children,” she said. “And now because of the wealth, it’s completely changed in my opinion.”