Rents Falling Faster than "Seasonality Alone"
Expect YoY Rents to Slow Further in Coming Months
The rental market is changing rapidly.
First, here are a few excerpts on rents from Fed Chair Jerome Powell’s speech yesterday:
Housing services inflation measures the rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing. Unlike goods inflation, housing services inflation has continued to rise and now stands at 7.1 percent over the past 12 months. Housing inflation tends to lag other prices around inflation turning points, however, because of the slow rate at which the stock of rental leases turns over. The market rate on new leases is a timelier indicator of where overall housing inflation will go over the next year or so. Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear (figure 3).
As figure 3 shows, however, overall housing services inflation has continued to rise as existing leases turn over and jump in price to catch up with the higher level of rents for new leases. This is likely to continue well into next year. But as long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year. Indeed, a decline in this inflation underlies most forecasts of declining inflation.
Some key points:
With new lease rates falling, existing leases will not have to increase as much as previously expected.
The sharp increase in new lease rates was due to the pandemic related surge in household formation. That is over, and household formation has slowed sharply - and rents are slowing sharply (and that would be happening regardless of monetary policy).
Since rents are falling - and will likely continue to fall - it probably makes sense to look at inflation ex-shelter for monetary policy over the next several months.
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 5.9% in October, down from 6.7% in September. And the annualized one-month change was negative in October! If the CPI report for November shows a similar slowdown in core CPI ex-shelter, perhaps monetary should be adjusted.
As an aside, Powell called housing a “bubble” in the Q&A:
“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand.” [Source: Lance Lambert at Fortune]
Rental Data shows Faster Decline than "Seasonality Alone"
From ApartmentList.com: Apartment List National Rent Report
Welcome to the December 2022 Apartment List National Rent Report. Our national index fell by 1 percent over the course of November, marking the third straight month-over-month decline, and the largest single month dip in the history of our index, going back to 2017. The timing of the recent cooldown in the rental market is consistent with the typical seasonal trend, but its magnitude has been notably sharper than what we’ve seen in the past, suggesting that the recent swing to falling rents is reflective of a broader shift in market conditions beyond seasonality alone. Going forward it is likely that rents will continue to dip further in the coming months as we move through the winter slow season for the rental market.
Over the course of the year as a whole, rent growth is continuing to outpace pre-pandemic years, but by an increasingly small margin. From January through November of this year, rents are up by a total of 4.7 percent, which is much closer to the growth rates we saw in 2018 and 2019 than it is to the astronomical 18 percent growth that we saw at this point last year. Year-over-year growth has decelerated rapidly since the start of the year, and is quickly converging back to pre-pandemic levels.
The cooldown in rent growth is being mirrored by continued easing on the supply side of the market. Our vacancy index now stands at 5.7 percent, after more than a year of gradual increases from a low of 4.1 percent last fall. And in the past three months, this easing of the vacancy rate has picked up steam again, after plateauing a bit over the summer. Today’s vacancy rate still remains below the pre-pandemic norm, but could get back to that benchmark as early as next spring, if the current rate of easing continues.
Rents appear to be decreasing more than just seasonally.
From Realtor.com: October Rental Report: Rent Prices Fall for the Third Straight Month
In October 2022, the U.S. rental market experienced single-digit growth for the third month in a row after nine months of slowing from January’s peak 17.4% growth. The median rent growth across the top 50 metros slowed to 4.7% year-over-year for 0-2 bedroom properties. It is the lowest growth rate in 18 months but is still nearly 1.5 times faster than the growth rate seen just before the pandemic hit in March 2020. The median asking rent was $1,734, down by $25 from last month and $47 from the peak.
CoreLogic also tracks rents for single family homes: CoreLogic: Annual Single-Family Rent Growth Decelerates for Fifth Consecutive Month and Seasonal Patterns Return
Consistent evidence of a single-family rental market cooldown follows nearly two years of above-trend rental price hikes. Year-over-year single-family rent growth slowed for the fifth consecutive month in September 2022 to 10.2%, down from a high of 13.9% in April 2022. Additionally, rent growth this September was slightly below that of September 2021. The rent increase slowdown comes as inflation stretches tenants’ pocketbooks.
“Annual single-family rent growth decelerated for the fifth consecutive month in September but remained at more than twice the pre-pandemic growth rate,” said Molly Boesel, principal economist at CoreLogic. “High mortgage interest rates may be causing potential homebuyers to hit pause and remain renters, keeping pressure on rent prices. However, the monthly rent change was negative in September, resuming the typical seasonal pattern for the first time since 2019, which could signal the beginning of rent price growth normalization.”
The 10.2% YoY increase in September was down from 11.4% in August.
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 shelter, rent of primary residence, Zillow Observed Rent Index (ZORI), and ApartmentList.com. (All set to 100 in January 2017)
Note: For a discussion on how OER, and Rent of primary residence are measured, see from the BLS: How the CPI measures price change of Owners’ equivalent rent of primary residence (OER) and rent of primary residence (Rent)
OER, rent of shelter, and rent of primary residence have mostly moved together. The Zillow index started in 2014, and the ApartmentList index started in 2017.
Here is a graph of the year-over-year (YoY) change for these measures since January 2015. All of these measures are through October 2022 (Apartment List through November 2022).
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 are picking up.
The Zillow measure is up 9.6% YoY in October, down from 10.8% YoY in September. This is down from a peak of 17.1% YoY in February.
The ApartmentList measure is up 4.5% YoY as of November, down from 5.6% in October. This is down from the peak of 18.1% YoY last December.
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 6.9% YoY in October, from 6.7% YoY in September - and will likely increase further in the coming months even as rents slow sharply.
My suspicion is rent increases will slow further over the coming months as the pace of household formation slows, and more supply comes on the market. Housing economist Tom Lawler recently wrote: "An actual decline in rents next year would be a reasonable base case". This is important for monetary policy.
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