Leaatog The Dlal Gutde Us
Oo Ioflatio

April 2024

Federal Reserve Chair Jerome Powell continues to emphasize that incoming data will guide changes in monetarypolicy. The challenge for the Fed is that the data often have collection issues and lags and sometimes send miEedsignals. Such was the case as the Consumer Price IndeE CPIE for March suggested infation was stronger thaneEpected, while the Producer Price IndeE PPIE showed modestly weaker than eEpected infation for the sameperiod.
The Fed has the capability to look through the vagaries of the data and draw their own conclusion. They also haveadditional data coming in, including their preferred infation measure Personal Consumption CEpenditures PCCE.

While we understand the desire for market participants
to try to handicap Fed policy, we think strong reactions
to these data releases give their accuracy a little toomuch credit. The Fed itself has acknowledged
shortcomings in the headline economic data and thepotential for revisions. With this in mind, we eEpect theFed to be holistic in their assessment of the available
data. For infation specifcally, that meansunderstanding trends in broader, market-based
measures of prices and not Vust the limited samples ofdata that are often used as key components ofgovernment price indices.
Given recent data releases, it seems like a good
moment to evaluate the data and do a deeper dive into
how infation is trending through our lens, leveraging
our data lake, Roofstock Rental Genome. Specifcally,
we took a closer look at CPI data, which has a very highweighting to shelter of more than K32.M

Shelter is a major driver of highheadline CPI over the past yearMtrchn2024nIoftation tat
M/M

Y/Y

CPI0.«%

3.5%

CPI ex-Shelter

0.«%

2.3%

PPI

0.2%

2.1%

Year-over-Year Change
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Jan-23
Feb-23Mar-23Apr-23
Ma#-23J)n-23J)l-23A)5-23
Sep-23Oct-23
Nov-23
Dec-23Jan-24Feb-24Mar-24The latest CPI and PPI data created signifcant
volatility in fnancial markets, bond yields rose, and theprobability of a June federal funds rate cut by theFederal :pen Market Committee F:MCE declined.

CPI

CPI ex-ShelterSource: U.S. Bureau of Labor Statistics

PPIShelter infation wasn’t thesurprisee in the latest CPI report, but it is the main factor keeping the headline numbers

high. CPI growth is much closer to the Fed’s 2% target with shelter excluded, as we see in the chart on the previous
page. Compounding the impact of shelter’s high weighting in the index are the measurements of growth being
used. Here’s a quick overview of the two primary components of the shelter metric:

Rent of Primary Residence: 7.7% of the overall CPI

Owners’ Equivalent Rent (OER): 26.8% of theindex, increased 5.7% year-over-year as of March –overall CPI index, increased by 5.9% year-over-yearthese data refect calculated rent growth for renter

as of March – the largest subcomponent of CPI byhouseholds occupying all types of rental housing inweight, OER is intended to measure shelterthe -.S. extrapolated from the CPI Housing Survey,

infation for owner-occupier householdse owners

which is limited in terms of both home count andare surveyed to help the cbS understand thegeography and tends to be dominated by continuing

weightings of the various components of housing

leases versus new leases.

costs, but the actual growth in OER is derived fromrent changes in comparable rental units from theCPI Housing Survey.

The BLS methodology to calculate rent growth for these two components is clearly resulting in stronger price gains
than broad-based market measures of rent growth on new leases would suggest. To better assess the accuracy ofthese two shelter components we sought to generate comparable indices using our automated valuation model(AVM) within Rental Genome and other sources. For rent of primary residence we applied rent growth rates to thedifferent types of rental housing using housing stock weights reported by the U.S. Census Bureau’s American
Community Survey. The growth rates for this component were derived from our rent AVM for single-family rentals(using 3–5-bedroom homes as a proxy), which increased by 2.6% year-over-year, and the growth rate for U.S.
multifamily housing asking rents of 0.9% as reported by Yardi Matrix.
Our blended growth rate for rent of primary residence was just 1.4% year-over-year as of March, a far cry from the
5.7% reported by the BLS. The more muted rent growth we calculated comports with residential landlord
sentiment, anecdotal and visible concessions offered to prospects, and a more sluggish leasing environment weobserve and hear about from industry peers and participants.
For OER, we applied our rent AVM to the owner-occupied housing stock. Similar to our approach with single-family
rental above, we focused on rent growth within 3–5-bedroom homes as a proxy for growth in this component.
Neighborhood quality is modestly better for these homes on average and the growth rate was slightly stronger thanfor single-family rental homes, at 2.7% versus 2.6%. While not as dramatically lower versus BLS data as rent ofprimary residence, 2.7% is still less than half the 5.9% BLS value for OER.
Housing costs for new owner occupiers likely grew close to the reported BLS estimate given rising home prices andmortgage rates, but the increased burden only affects the small number of households who purchased a home overthe past year. Most existing owner occupiers either have a xed-rate mortgage or own their homes free and clear
resulting in little to no shelter ination, although growth in related services can certainly occur.G© 2024 Roofstock Inc.

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Rolling these values up into the shelter fgures oe estimate overall shelter grooth of r30 and resultant CP
grooth similarly at r30, as detailed in the table beloor Monetary policy functions oith long and variable lags, but
the Fed’s current stance does seem to be putting infation more on track to reach the r.0 target than headline CPindicatesr We submit that the Fed may be, or ought to be, considering a broader set of inputs beyond reported
metrics of infation as it contemplates ohen to begin and hoo to pace changes in monetary policy this yearr
Admittedly their task is not an easy one given the tight labor market, sturdy consumer spending, and an uncertain
geopolitical landscaper Market participants should be more circumspect about the headlines, ohile preparing forthe inevitable bumps and toists in the roadr£

YOY CPI & CPI Component Growth – March 2024
CPI CoYHonent
Weights

Growth - MLS
ReHorted

Growth - Roofstock
Adjusted Rents

CPI ex-Shelter

63.8%

2.3%-Shelter

36.2%
7.7%
1.3%
26.8%
0.4%

5.7%
5.7%
-1.9%
5.9%
4.6%

2.3%
1.4% 

*-1.9%
2.7% **
4.6%

100.0%

3.5%

2.3%

Rent of Primary Residence
Lodging Away from Home
Owner’s Equivalent Rent
Tenants’ & Household Insurance

CPI Overall

Source: U.S. Bureau of Labor Statistics (BLS), U.S. Census Bureau, Yardi Matrix, Roofstock Rental Genome, Roofstock Research*Rental Genome rent AVM for renter-occupied 3-5 bedroom homes, U.S. Census Bureau, Yardi Matrix, Roofstock Research estimates** Rental Genome rent AVM for owner-occupied 3-5 bedroom homes

Questions? Clease contact:
Paul Briggs, RE
Head of Research & Pnvestment Strategies
paulrbriggs@roofstockrcom

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This information is intended for educational purposes only and is not fnancial, investment, legal, or tax advice. Roofstock is not youradvisor or agent. Please consult your own advisor for guidance. Although Roofstock provides information it believes to be accurate,
Roofstock makes no representations or warranties about the accuracy or completeness of the information contained in this article.
© 2024 Roofstock Inc.

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