Rents Still Increasing Sharply Year-over-year

Higher Rents will impact measures of inflation in 2022

From ApartmentList.com: Apartment List National Rent Report

Welcome to the April 2022 Apartment List National Rent Report. Rent growth is continuing to pick up steam again, after a brief winter cooldown, with our national index up by 0.8 percent over the course of March. So far this year, rents are growing more slowly than they did in 2021, but faster than the growth we observed in the years immediately preceding the pandemic. Year-over-year rent growth currently stands at a staggering 17.1 percent, but most of that growth took place last spring and summer. Over the first three months of 2022, rents have increased by a total of 1.8 percent, but we’re just beginning to enter the busy season for the rental market, when the bulk of annual rent growth typically occurs.

On the supply side, our national vacancy index is continuing to slowly inch up, indicating a gradual easing of the tight market conditions that have characterized the rental market over the past year. Our vacancy index hit 4.6 percent this month, continuing a seven month streak of increases after bottoming out at 3.8 percent last August. Rents increased this month in 93 of the nation’s 100 largest cities, with Sun Belt markets in Florida and Arizona continuing to see some of the nation’s fastest growth.

Our national rent index closed out 2021 with a 0.2 percent month-over-month decline, making December the only month last year in which rents fell. That price dip proved to be short lived, however, with rent growth returning to positive territory over the past three months. Our national rent index increased by 0.8 percent month-over-month in March. This is a bit slower than the 1.3 percent increase that we saw last March, when the 2021 rent growth boom was just starting to pick up steam. It’s also well below the 2.3 percent average monthly rent growth that we saw from last April through September. But even if growth has cooled down substantially from last summer’s peak, it is also pacing well ahead of the pre-pandemic norm for this time of year. In the first three months of 2022, rents nationally have increased by a total of 1.8 percent, which is twice as fast as the growth that we saw over the same period in 2018 (0.9 percent) and 2019 (0.8 percent).

emphasis added

Rents are still increasing, but not as quickly as a year ago. There is some positive news on the supply side, from rental housing economist Jay Parsons on Twitter:

Rent growth isn't popular of course, but here's one benefit: LOTS of new apartment construction to meet the tidal wave of demand, and hopefully boost vacancy / availability. New completions will top 400k units for the first time in 40+ years in 2022 -- and even more in '23.

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 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 February 2022 (Apartment List through March 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 17.0% YoY in February, up from 16.2% YoY in January. And the ApartmentList measure is up 17.1% as of March, down from 17.7% in February. 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). This sharp increase in new lease rates should spill over into the consumer price index over the next year (as discussed in earlier article).

There is a paper at NBER on this topic from Marijn A. Bolhuis, Judd N. L. Cramer and Lawrence H. Summers: The Coming Rise in Residential Inflation

Our findings suggest that if past relationships hold into 2022, housing inflation is likely to move to between 6.5 percent and seven percent and make a significant contribution to overall inflation in 2022, ranging from one to nearly three percentage points. Although our projections suggest that residential inflation will peak in late 2022, we expect it to remain elevated in 2023.

Clearly rents are still increasing, and we should expect this to continue to spill over into measures of inflation in 2022. The Owners’ Equivalent Rent (OER) was up 4.3% YoY in February, from 4.1% YoY in January - and will likely increase further in the coming months.