Rents Continue to Decline; "Apartment Market Loosens"
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The rental market has changed rapidly. This index from the National Multifamily Housing Council (NMHC) has been an excellent leading indicator for rents and vacancy rates, and this suggests higher vacancy rates and falling asking rents in the coming months.
“The Fed’s interest rate hikes are having their intended effect on prices, as monthly apartment rents decreased nationwide,” noted NMHC’s Chief Economist, Mark Obrinsky. “Rents are still higher than year-ago levels, but this reflects past, not current rent inflation.” ... • The Market Tightness Index came in at 14 this quarter—well below the breakeven level (50)—indicating looser market conditions for the second consecutive quarter. Over three-quarters of respondents (78%) reported markets to be looser than three months ago, while only 5% thought markets have become tighter. Another 16% of respondents thought that market conditions were unchanged over the past three months.
Rental Data shows Faster Decline than Seasonality Alone
Welcome to the February 2023 Apartment List National Rent Report. Our national rent index fell by 0.3 percent over the course of January, marking the fifth straight month-over-month decline. This month’s price dip was notably more moderate than the record-setting declines we saw from October through December. That said, January’s decline was still sharper than the usual seasonal trend, signaling the continuation of a broader cooldown in market conditions.
Year-over-year rent growth is continuing to decelerate, and now stands at 3.3 percent, its lowest level since April 2021. Year-over-year growth is now pacing just slightly ahead of the average rate from 2018 to 2019 (2.8 percent), and is likely to decline further in the months ahead.
We estimate that the national median rent fell by 0.3 percent month-over-month in January. This is the fifth consecutive monthly decline, albeit a much more modest one than the three prior months, which rank as the three largest month-over-month declines in the history of our estimates (starting in January 2017). That said, this month’s decline was still notably sharper than the average January decline of 0.1 percent in the pre-pandemic years of 2018 and 2019.
The cooldown in rent growth is being mirrored by continued easing on the supply side of the market. Our vacancy index now stands at 6.1 percent, surpassing 6 percent for the first time since spring of 2021. With a record number of multi-family apartment units currently under construction, we expect that supply constraints will continue to soften. 2023 could be the first time in years that we see property owners competing for renters, rather than the other way around.
emphasis added
Rents appear to be decreasing more than just seasonally.
After an entire year of slowing down, the year-over-year median rent growth for 0-2 bedroom properties across the top 50 metros hit 3.2% in December 2022, the lowest growth rate in 20 months, down notably from January’s peak trend (17.4%). However, after four months of declines, median asking rent plateaued in December ($1,712). It is down by $69 from the peak (July 2022) and is still $308 (21.9%) higher than December 2019 (pre-pandemic).
Single-family rental price increases dropped to 7.5% year over year in November, with all four tracked price tiers posting lower gains than a year earlier. November marked the seventh consecutive month of annual deceleration, and while Florida metro areas continued to post the nation’s highest rental cost gains, other Sun Belt cities such as Phoenix and Las Vegas that formerly showed the highest rent increases are now at the bottom. CoreLogic expects that rental price growth, along with home price appreciation, will continue to level off during the first part of 2023.
“An increase in single-family rental inventory is cooling price growth rapidly,” said Molly Boesel, principal economist at CoreLogic. “November’s annual U.S. rent growth was the slowest since May 2021 and two of the previously hottest markets — Phoenix and Las Vegas — posted the lowest gains among major metro areas. Looking forward, rent growth should continue to moderate and better balance market conditions.”
The 7.5% YoY increase in November was down from 8.8% in October.
Rent Data
I’m going to update some of the data on rents. Here is a graph of several measures of rent since 2000: OER, rent of primary residence, Zillow Observed Rent Index (ZORI), ApartmentList.com and CoreLogic Single Family Rental Index (All set to 100 in January 2017)
OER and rent of primary residence have mostly moved together. The Zillow index started in 2014, the ApartmentList index started in 2017, and CoreLogic in 2004.
Here is a graph of the year-over-year (YoY) change for these measures since January 2015. Most of these measures are through December 2022, except CoreLogic is through November and Apartment List is through January 2023.
Note that new lease measures (Zillow, Apartment List) dipped early in the pandemic, whereas the BLS measures were steady. Then new leases took off, and the BLS measures continued to decline for several months - and are now increasing while the private measures are falling.
The CoreLogic measure is up 7.5% YoY in November, down from 8.8% in October, and down from a peak of 13.9% in April 2022.
The Zillow measure is up 7.4% YoY in December, down from 8.4% YoY in November, and down from a peak of 17.0% YoY in February 2022.
The ApartmentList measure is up 3.2% YoY as of January, down from 3.9% in December, and down from a peak of 18.1% YoY November 2021.
Both the Zillow measure (a repeat rent index), and ApartmentList are showing a slowdown in rental increases in rents. From Zillow:
“ZORI is a repeat-rent index that is weighted to the rental housing stock to ensure representativeness across the entire market, not just those homes currently listed for-rent.”
And from ApartmentList:
At Apartment List, we estimate the median contract rent across new leases signed in a given market and month. To capture how rents change in a market over time, we estimate the expected price change that a rental unit should experience if it were to be leased today.
Both of these measures reflect new leases, whereas most rental units don’t turnover every year (as captured by the BLS measures). The sharp increase in new lease rates in 2021 and early 2022 is spilling over into the consumer price index now (as discussed in earlier article).
Rents are still increasing YoY, and we should expect this to continue to spill over into measures of inflation. The Owners’ Equivalent Rent (OER) was up 7.5% YoY in December, up from 7.1% YoY in November - and might increase a little further in the coming months even as rents slow sharply.
Conclusion
My suspicion is rent increases will slow further over the coming months based on the slowdown in household formation and with more supply coming on the market. It is possible that we will see a year-over-year decline in asking rents sometime this year.
This decline in rents has implications for monetary policy. This graph shows the year-over-year change in Core CPI ex-Shelter (blue), and the one month change annualized (red).
The year-over-year change was at 4.4% in December, down from 5.2% in November, and down from a peak of 7.6% YoY in February. And the annualized one-month change was negative in October, November and December! If the CPI report for January shows a similar slowdown in core CPI ex-shelter, we might see a pause in FOMC rate hikes in March.
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