First, household formation and absorption are important topics. Here is a tweet from Jay Parsons, Deputy Chief Economist at Real Page on apartment absorption:
With 2021 in the books, it now goes down as the biggest year for apartment demand in the three decades we've tracked the market ... obliterating the previous high set in 2000 by 66%. A total of 673,448 market-rate units absorbed, on net, in 2021. Really remarkable.
Demand for market-rate apartments in 2021 soared far above the highest levels on record in the three decades RealPage has tracked the market. Net demand totaled more than 673,000 units – obliterating the previous high set in 2000 by a remarkable 66%. Demand would have been even stronger if not for record-low vacancy, severely limiting the number of units available to rent.
Strong demand drove up apartment occupancy 2.1 basis points year-over-year to 97.5%. Both the increase and the resulting rate were the highest on record since RealPage began tracking apartments in the early 1990s.
Household formation is likely occurring at a faster clip than official government data sources are reporting. It’s not just apartments. We’re seeing huge demand and ultra-low availability for all types of housing – including for-sale homes and single-family rentals – in essentially every city and at every price point.
This is different from the Moody Reis apartment data (large cities only) that showed absorption was close to normal, but that the lack of completions was driving down the vacancy rate.
Asking Rents Increase Year-over-year, Down Seasonally
Our national index fell by 0.2 percent during the month of December, marking the only time in 2021 when rents declined month-over-month. A slight dip in rents at this time of year is typical of seasonality in the market, but it’s especially notable after a year of record-setting growth. Over the course of calendar year 2021, the national median rent increased by a staggering 17.8 percent. To put that in context, annual rent growth averaged just 2.3 percent in the pre-pandemic years from 2017-2019.
This appears to be the normal seasonal slowdown in rent increases. Note that rents fell for much of 2020.
I’m going to update some of the data that shows rents are accelerating. 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)
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 November 2021 (Apartment List through December).
The Zillow measure is up 12.6% YoY in November, up from 12.0% YoY in October. And the ApartmentList measure is up 17.8% as of December, up from 17.7% in November. Both the Zillow measure (a repeat rent index), and ApartmentList are showing a sharp increase 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). Adam Ozimek, Chief Economist at @Upwork explained this succinctly:
But this sharp increase in new lease rates should spill over into the consumer price index over the next year (as discussed in earlier article).
Clearly rents are increasing sharply, and we should expect this to continue to spill over into measures of inflation in 2022. The Owners’ Equivalent Rent (OER) was up 3.5% YoY in November, from 3.1% in November - and will increase further in the coming months.
