Economists at the San Francisco Fed anticipate that the deceleration of U.S. housing costs will continue through the end of the year, with a return to pre-pandemic trends by 2025.

According to the latest research from the San Francisco Fed, housing costs, which are the largest contributors to U.S. inflation, are expected to ease before the end of this year and return to pre-pandemic trends by 2025.

In a research report published on the bank's official website on Tuesday, San Francisco Fed economists Oscar Jorda and Aren Yalcin wrote, "We expect housing inflation to continue to decline in the coming months." They cited a model that includes indicators measuring the balance of housing supply and demand.

The U.S. Bureau of Labor Statistics measures housing costs using new leases, average rents of existing leases, and the expenses that owners must pay when they are compelled to rent out their homes. These costs constitute a significant portion of the Consumer Price Index (CPI), and their higher-than-expected readings earlier this year led Federal Reserve officials to maintain higher interest rates for a longer period to curb the surge in living costs.

However, housing costs differ from the prices of other goods and services, which decline as high borrowing costs suppress demand. Housing supply may be negatively affected because higher interest rates make construction costs higher, leading to increased housing costs.

The two economists wrote: "Overall, rental prices will eventually slow down, but the pace of deceleration in rental prices will be much slower compared to the prices of other goods and services, as the supply of other goods and services is less sensitive to interest rates."

Jorda and Yalcin constructed a model to predict housing inflation using data from the Census Bureau on the gap between the number of new households and the number of housing completions, the number of new housing units under construction, and rental asking prices from the housing listing company Zillow. They also considered past values of housing inflation, core CPI excluding food and energy, unemployment rates, and the Federal Reserve's benchmark interest rates.

"Taken together, these indicators suggest that housing inflation will continue to decline to more traditional levels next year," they said.

According to the model, the U.S. housing inflation rate could drop to 2% before the end of this year and then return to the pre-pandemic average of 3.3% in the spring of 2025. The authors of the study emphasize the direction of the forecast rather than the numerical predictions or the time frame of the model.