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The Rapid Increase in Rents
What is happening? Why? And what will happen.
Over the last several months there has been a pickup in rents, especially for single family homes.
There are three key questions:
What is happening with rents?
Why are rents increasing rapidly?
What will happen?
I don’t have all the answers, but I’ll offer some preliminary thoughts.
What is happening with rents?
Housing economist Tom Lawler has been sending me rent data since early this year indicating that rent growth was accelerating. And Christophe Barraud, Chief Economist, Strategist at Market Securities has summarized much of the recent data in U.S. Rents Rise Most On Record
U.S. single-family rent growth increased 7.5% in June 2021, the fastest year-over-year increase since at least January 2005, according to the CoreLogic Single-Family Rent Index (SFRI). The index measures rent changes among single-family rental homes, including condominiums, using a repeat-rent analysis to measure the same rental properties over time. The June 2021 increase was more than five times the June 2020 increase, and while the index slowed to a post-pandemic low last June, rent growth is running well above pre-pandemic levels when compared with 2019.
Typical U.S. rents grew 9.2% year-over-year in July, according to the Zillow Observed Rent Index (ZORI) — the fastest recorded by Zillow records in data that reaches back through 2015 — to $1,843/month. Projecting forward historical ZORI values from February 2020 — the last full month before the COVID-19 pandemic hit the U.S. in earnest — we estimate that the U.S. ZORI in July was 2.9% ($52) higher than where it would have been if the last roughly 18 months had been more ‘normal.’
From the National Multifamily Housing Council (NMHC): July Apartment Market Conditions Showed Improvement Across All Metrics
We are witnessing strong, broad-based demand for apartments as the U.S. economy continues to recover,” noted NMHC Chief Economist Mark Obrinsky. “Many U.S. gateway metros, which were among those hardest hit during the coronavirus pandemic, have now seen their occupancy rates return to near-pre-pandemic levels. Meanwhile, rent growth remains particularly strong in a number of Sun Belt and Mountain markets.”
The Market Tightness Index increased from 81 to 96 – the highest index number on record – indicating widespread agreement among respondents that market conditions have become tighter. Nearly all (92 percent) respondents reported tighter market conditions than three months prior, compared to only 1 percent who reported looser conditions.
The following graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tighter conditions from the previous quarter.
This indicates market conditions tightened further in July, after being especially weak during the early months of the pandemic.
And from Rick Paliacios Jr, Director of Research at John Burns Real Estate Consulting:
And from Christophe Barraud Chief Economist, Strategist at Market Securities:
Why are Rents Increasing Rapidly?
Here are some initial thoughts …
What drives demand for housing is household formation. Even though population growth in 2020 was dismal (see Tom Lawler’s Lawler: Update on the Dismal Demographics of 2020; "Smallest Population increase since 1918"), household growth probably picked up in 2021.
A couple of possible reasons for household growth include:
Some younger adults probably moved in with their parents or relatives (or stayed with them) during the worst of the pandemic, and are now moving out.
Divorces might have increased in 2021 splitting households.
Unfortunately we will not have data on household formation for some time (for example, data on divorces is only available through 2019).
Some other factors might include more properties being converted into short term rentals, removing them from the long term rental housing stock, and also the eviction moratorium has probably also had an impact on rents.
The preference for single family homes (and the corresponding larger rent increases) is partially due to the pandemic, and the desire for more space - especially for people working at home. And with the rapid increase in home prices, and lack of for sale inventory, some people are looking to rent single family homes instead.
What will happen?
Once again, these are just some initial thoughts …
First, there are quite a few apartments under construction. There have been significant delays in construction, but we should expect quite a few completions over the next year increasing supply.
The following graph shows starts under construction, Not Seasonally Adjusted (NSA), as of July 2021.
Red is single family units. Currently there are 711 thousand single family units under construction (NSA). This is the highest level since 2006.
Blue is for 2+ units. Currently there are 686 thousand multi-family units under construction. Last month, at 691 thousand units, was the most since 1974.
According to the Census Bureau, it took 6.8 months on average to build a single family home in 2020, and 15.4 months to build buildings with 2 or more units. With the pandemic related supply chain delays, the length of time to build probably increased significantly this year (2021 data will be released in March 2022).
Second, if what is driving household formation is a spike in younger adults moving out - and in divorces - that might ease by 2022.
So my sense is the rapid increase in rents will not persist.
A key impact of rising rents will be on inflation. Owners' equivalent rent of residences (OER), and rent of primary residences make up almost 1/3 of the consumer price index (CPI). Although CPI was up 5.3% year-over-year (YoY) in July, OER was only up 2.4% YoY. And rent of primary residence was up 1.9% YoY. The recent rent increases will boost OER later this year, and this will impact the measures of inflation.