Lawler: Are US Rents Falling?

From housing economist Tom Lawler:

After increasing at a pace unseen in US history from the Spring of 2021 to the middle of 2022, it appears as if US rent growth has slowed sharply over the past few months. Indeed, the most “high frequency” data (meaning most timely) suggest that US rents may have stopped increasing this Fall, and may actually have begun to decline.

Below is a chart showing the YOY growth rates for three relatively widely followed rent indexes: Apartment List’s National Rent Index, Zillow’s Observed National Rent Index, and CoreLogic’s Single Family National Rent Index. The ALNRI data are through October; the ZONRI is through September, and the CLSFNRI is through August. THE ALNRI is for apartments; the ZONRI is for SF homes and multifamily apartments; and the CLSFNRI is for single-family homes. The ZONRI and CLSFNRI are “smoothed” and represent 3-month moving averages, while the ALNRI is not smoothed.

CR Note: CoreLogic released the September Single Family Rent Index this morning, showing rents declined month-over-month in September, and slowed to a 10.2% annual rate.

As the chart shows, US rents initially fell following the onset of the pandemic, but then began to rise an extremely rapid pace from the Spring of last year through the middle of this year.  Since then, however, rent growth has slowed significantly.  While the YOY % gains through last month are still significant, a look at the monthly numbers suggests a more significant slowdown.

Below is a table showing the monthly % changes in these rent indexes NOT adjusted for seasonal fluctuations.

CR Note: The CoreLogic index was negative in September (released this morning).

Note that the Apartment List Index, which is not smoothed, has shown two consecutive monthly declines, while the Zillow Index, which IS smoothed, fell for the [first] time in over two years last month.  Note also that the CoreLogic Index, available only through August and which is smoothed, decelerated sharply during “August.”

The above table can be a bit misleading, however, because all three rent indexes display relatively modest but statistically significant seasonal fluctuations, but only Zillow also produces a seasonally adjusted smoothed rent index.

Apartment List data only go back to 2017, and as such producing reliable seasonal factors is challenging.  Having said that, on the next page is a table showing monthly % changes in these rent indexes on a seasonally adjusted basis using a fairly simple seasonal adjustment process. (And in Zillow’s case, using its own seasonally adjusted series).  The table also shows the monthly % changes in the 3-month moving average of the seasonally adjusted Apartment List Index, so that it is more comparable to the other monthly indexes.

Note that while the Apartment List Index on a seasonally adjusted basis showed no change in August of this year, the “smoothed” index showed a 0.44% increase.  It would not be surprising if the two other rent indexes, if not smoothed, would have showed no increase (or perhaps even a small decline) in their last reported month.

While none of these rent indexes is perfect, the latest data suggest that US rent growth has slowed sharply in recent months, and at best has been growing in the low single digits and quite possibly may have actually turned slightly negative last month.  If so, that is certainly no surprise, and as I said in an earlier report, I expect that US rents in 2023 will be lower than rents during this Summer and Fall.

Rent Indexes and the CPI

For those interested in the topic of why rent measured by the CPI (and PCEPI) have differed so dramatically from private measures of market rents, a MUST READ is the recent (October 6, 2022) BLS Research Paper entitled “Disentangling Rent Index Differences: Data, Methods, and Scope” by Brian Adams, U.S. Bureau of Labor Statistics; Lara Loewenstein, Federal Reserve Bank of Cleveland; Hugh Montag, U.S. Bureau of Labor Statistics; and Randal Verbrugge, Federal Reserve Bank of Cleveland.

While I’ll have more on this topic in a latter report, here is the conclusion section from the paper.  (I’ve put in a few “bolds” not in the paper.)

“Housing occupies a prominent place in aggregate price indexes, so accuracy in rent inflation measurement is crucial for accurate inflation measurement. But recently, the accuracy of CPI rent inflation measurement has been called into question, prompted mainly by divergent signals from other rent measures. These differences are consequential. For example, replacing CPI rent with Zillow’s ZORI would have raised headline CPI inflation in May 2022 by more than 3 percentage points. Moreover, alternative rent indexes have different dynamic properties, so their inclusion in aggregate indexes could have first-order influence on parameter estimates of macroeconomic and financial models. Thus, an important question is: what drives the differences between these rent indexes? To answer this question, we construct repeat rent indexes using the confidential rent microdata used for CPI rent index. These data represent the only data source suitable for this analysis, because they are the high-frequency rent data that are fully representative of the U.S. rental market. We demonstrate that the discrepancy between CPI rents and other rent indexes is almost entirely driven by differences in rent growth for new tenants relative to the average rent growth for all tenants. CoreLogic’s SFRI has a surprisingly close relationship to our new tenant repeat-rent index over our sample period, despite the fact that SFRI data are not representative: they pertain only to larger and more expensive single-family units, and are not fully geographically representative. SFRI rent movements help predict CPI rent movements. Which rent index is most suitable for use in the CPI? Index purpose should guide index design. Many of the important uses of the CPI, such as contract escalation and social security indexation, favor the use of average rents rather than new-tenant rents. But an important question for future research relates to macroeconomic modeling by central bankers. New tenant rent indexes more quickly reflect inflationary pressures, which in turn will strongly 13 influence model parameter estimates. The issue of which rent index best relates to central bankers’ objectives is not a trivial one. We contribute to this debate chiefly by highlighting the different dynamic properties of these indexes, and by raising two key operational issues: repeat-rent indexes are noisy in real time and can experience large revisions for a few years.”