Red-hot rental market is cooling in a good sign for inflation
Updated: Feb 8
Jan. 21, 2023
View source version HERE
Economic jitters and a construction boom are helping cool a red-hot rental market in a shift that could be good news for the overall economy.
Renters are on track to get some relief in 2023 as a growing number of indicators suggest the red-hot rental market has started to cool, a shift that could also help bring down decades-high inflation that has been pushing interest rates higher.
Surging rental costs have been one of the biggest drivers of inflation over the past two years after year-over-year rent increases peaked at 17% last January, according to data from Realtor.com. But economists and industry analysts are expecting a significant slowdown this year driven by a wave of new apartment construction and more renters staying put amid economic uncertainty.
That shift is good news not only for renters, but for the economy as a whole. A slowdown in rent increases could help ease inflation with shelter costs making up a third of the consumer price index, which is one of the metrics the Federal Reserve uses to gauge whether to continue hiking interest rates. Those higher interest rates have made it more expensive for consumers to borrow money for big-ticket purchases, like a car or home, and for businesses needing to take out a loan to expand.
“The balance of power in the rental market has really shifted very rapidly to renters,” said Jay Parsons, chief economist for real estate technology firm RealPage. “We’ve seen that rent growth has really slowed down. We’ve now got four straight months where month-over-month new leases have actually come down. The market has really changed materially.”
In the last several months of 2022, online real estate firms Zillow, Redfin and Apartment List recorded significant drops in rental asking prices.
The cooling rental market has yet to show up in the federal inflation data because those numbers reflect what renters are paying on their existing leases rather than what landlords are currently charging new tenants, leading to about a 12-month lag in the federal data, researchers have found. The consumer price index, for instance, showed a 0.8% increase in how much consumers were paying for rent from November to December, while Zillow found a 0.3% drop in asking prices over the same period.
But as renters enter new leases with smaller increases or find a better deal at another property, the slowdown will start to show up in the federal data as soon as this spring, said Jeff Tucker, senior economist at Zillow.
“We saw the year-over-year growth in our rent index peak last February, and it’s been decelerating ever since then,” Tucker said. “We’ve had month-over-month declines in our rent index in the last few months, so that’s a promising look ahead that the CPI measures of rent are likely to turn the corner sometime this spring and start to decelerate.”
Even before falling rents are factored in, inflation has been showing signs of improving, helped largely by a drop in gas prices. The consumer price index fell 0.1% in December compared to the prior month, the largest monthly decline since the start of the pandemic. Prices are still up 6.5% from a year ago, though that's down from 9% in June.
Helping drive rents lower is an overall slowdown in how frequently people are moving compared to the pandemic-driven churn seen over the past two years. U-Haul saw one-way moves decline in 2022 from the record numbers it saw in 2021 and 2020, according to a company spokesperson. That trend is set to continue into 2023 as more people are expected to stay put amid economic uncertainty and fears of a recession.
“It takes some confidence in yourself and the economy and your job to go and sign a lease for 12 months or to buy a house,” Tucker said. “These big commitments are a bit of a vote of confidence in how things are going to go for the next 12 months and a lot of data shows people weren’t feeling that confident in the last several months of 2022.”
Rents have also varied widely based on geography, with some of the hottest markets seeing the most drastic slowdowns while more affordable markets were some of the few places to see rent increase. In December, rents fell 0.9% in Las Vegas and 0.8% in Dallas while Cleveland, Pittsburgh, and Charlotte, North Carolina, were among a handful of cities to see rents increase last month, according to Zillow.
Also driving down rents is a wave of new apartment buildings that have been opening over the past year. In 2021 and 2022, more than 800,000 new apartments came on the market with apartment building construction at its highest levels in 50 years.
But not all renters will feel the same level of relief from that building boom. Given the high cost of new construction, the vast majority of new buildings coming on the market will be targeted at the wealthiest renters. That will mean increasing competition among luxury buildings with landlords offering incentives like a month of free rent or gift cards worth hundreds of dollars.
That competition isn’t expected to trickle down to the lower or middle end of the market anytime soon, though, and the high cost of construction has made it prohibitive for developers to build more affordable rental buildings unless they receive local or federal subsidies, which have remained limited, real estate economists said.
“It’s really challenging for developers to build given the high cost of land and labor and materials and everything else to build affordable housing without these subsidy programs,” Parsons said. “So while we’re seeing 40-year highs in construction, the vast majority of this is luxury rental properties that will be leasing to six-figure-income households. We’re not really meeting that demand at the lower end of the market, unfortunately.”
Click here to return to the homepage
View source version on nbcnews.com HERE