Zillow’s Insights on CPI and ZORI: A day ahead of shelter inflation release

What Happened?

In tomorrow’s CPI shelter release, we expect a continued slowdown in seasonally adjusted CPI for owner’s equivalent rent (OER). Zillow’s model connecting on-market rent forecasts for new leases (captured by Zillow’s Observed Rent Index) to rent increases across the rental market (both new and renewed leases) predicts an increase of 0.30% in January, an annualized rate of 3.65%.  However, this dynamic pushed further into the future implies a year-end OER inflation rate of 3.23% in 2025, an upward revision from the previous month. Similarly, we expected CPI for renting your own residence to continue to slow into January, increasing by 0.28%, an annualized rate of 3.36%, with the more distant, end-of-year forecast also revised upwards, now expecting 2.9% growth for 2025. 

Why it matters

The original pandemic shock to on-market rents will take a long time to filter through OER. And Zillow’s new higher rent forecasts imply that it will take a little longer still.

Higher expectations for rent growth over the latter half of the year are related to more pessimistic expectations for mortgage rates, and the increasing barriers that higher mortgage rates put on the ability of first-time buyers to move into homeownership and out of rental markets. As America’s need for rental housing continues to increase, rent growth is expected to remain high. 

On-market rents impact the rents of the fuller rental market directly by (1) exerting market pricing pressure and lifting rents in the market for new rental leases and renewals, and indirectly by (2) incentivizing an existing landlord to bring rents on a renewal closer to prevailing market rents, or (3) when a renter moves between the these two rental markets – when they decide to change units and landlords after a long time, jumping from the marketr for a renewal (where renters are often insulated from on-market rents by longtime landlords) to the higher active market rents. 

How we did it: Rental market modeling in Zillow Economics

Zillow Eeconomics tracks changes in asking rent on active individual listings, and then weighs that data to reflect the full rental stock. That’s the tool we have in Zillow’s Observed Rent Index. 

To help anticipate the shelter component of CPI, Zillow Economics creates a model of the rental market behind our view of the active market for new leases. This requires setting a few assumptions, like how often people move (we looked at census data for a good ballpark), and applying some structure, like the logic a landlord may use to increase rent for an existing tenant – a kind of “catch up” mechanic between rent for renewed leases and active market rents. 

Using this economic model, we shock the system with observed ZORI and its newly released forecast, ZORF, to generate a theoretical CPI. This theoretical CPI is the result if all landlords and all renters were as simple and straightforward as our assumptions. The Shelter CPI numbers that dropped today reflect the tapestry of a more complex reality – different renters, different landlords, randomness, and mismeasurement – complexity that can be better anticipated by playing out a little structure. That’s why we love economics. 

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