Year-over-year Rent Growth Continues to Decelerate
calculatedrisk.substack.com
Tracking rents is important for understanding the dynamics of the housing market. For example, the sharp increase in rents helped me deduce that there was a surge in household formation in 2021 (See from September 2021: Household Formation Drives Housing Demand). This has been confirmed (mostly due to work-from-home), and also led to the supposition that household formation would slow sharply now (mostly confirmed) and that asking rents might decrease in 2023 on a year-over-year basis.
This is important for understanding housing, but also for monetary policy. Asking rents reflect new leases, whereas most rental units see annual rent increases. These annual increases are captured by the consumer price index (CPI) and personal consumption expenditures (PCE) prices. So, shelter in CPI is significantly lagged to asking rents.
But there is more! Once we understand that asking rents will likely be flat to down year-over-year - due to the slowdown in household formation and more supply coming on the market - this suggests shelter in the CPI could be flat in the future. That means we shouldn’t just look at various measures ex-shelter, but we should assume shelter will be lower than overall inflation in the future!
Of course, the official data is still showing a surge in rents. Here is a graph of the year-over-year change in shelter from the CPI report and housing from the PCE report last week, both through March 2023:
CPI Shelter was up 8.2% year-over-year in March, up from 8.1% in February. Housing (PCE) was up 8.3% YoY in March, from 8.2% in February. Since rents are soft and "Apartment Market Continues to Loosen" this means both CPI and PCE measures are currently drastically overstating actual inflation.
Monetary policy can’t change the past. This data suggests the Fed should pause hiking rates at the meeting this week.
Welcome to the May 2023 Apartment List National Rent Report. Our national rent index increased by 0.5 percent over the course of April. This is the third straight monthly increase in rent prices, but represents a slight slowdown from last month at a time of year when growth is typically picking up steam. This month’s increase was also less than the typical April price change that we saw in pre-pandemic years. Even though prices are trending up again, a combination of sluggish demand and increasing supply is keeping rent growth in check.
Year-over-year rent growth is continuing to decelerate, and now stands at 1.7 percent, its lowest level since March 2021. Year-over-year growth is now below the average rate from 2018 to 2019 (2.8 percent), and it is likely to decline even further in the months ahead.
On the supply side, our vacancy index currently stands at 6.8 percent, surpassing the average pre-pandemic rate and continuing to trend upward. With a record number of multi-family apartment units currently under construction, some property owners may start struggling to fill vacancies for the first time since the early stages of the pandemic.
In March 2023, the U.S. rental market experienced single-digit growth for the eighth month in a row after fourteen months of slowing from a high market of 16.4% growth in January 2022. Median rent across the top 50 metros was up just 2.5% year-over-year for 0-2 bedroom properties. The median asking rent was $1,732, up by $15 from last month and down by $32 from the peak but is still $354 (25.7%) higher than the same time in 2019 (pre-pandemic).
U.S. single-family rent price growth continued its slowdown in February, dropping to 5%, with metro-level trends indicating that renters are perhaps seeking more affordable areas. For instance, St. Louis, historically one of the least-expensive 20 rental markets for which CoreLogic publishes data, was at the bottom for gains in February 2022 but topped the index for growth in February 2023. …
“Rental cost growth relaxed again in February but is still increasing nationwide year over year,” said Molly Boesel, principal economist at CoreLogic. “Less-expensive metros have emerged as those with the highest appreciating rental costs, as tenants contend with elevated rents and inflation. However, while the top U.S. metros for rental cost growth are increasing annually by about 8%, that is well below the rates of 20% to 40% seen one year ago.”
The 5.0% YoY increase in February was down from 5.7% in January.
Rent Data
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 March 2023, except CoreLogic is through February and Apartment List is through April 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 have followed.
The CoreLogic measure is up 5.0% YoY in February, down from 5.7% in January, and down from a peak of 13.9% in April 2022.
The Zillow measure is up 6.0% YoY in March, down from 6.3% YoY in February, and down from a peak of 16.9% YoY in February 2022.
The ApartmentList measure is up 1.7% YoY as of April, down from 2.4% in March, and down from a peak of 18.3% 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).
The Owners’ Equivalent Rent (OER) was up 8.0% YoY in March unchanged from 8.0% YoY in February. The YoY change in OER has probably peaked but will stay elevated for some time even though asking rent growth has slowed sharply.
Conclusion
My suspicion is year-over-year rent increases will slow further over the coming months with slow household formation, and as more supply comes on the market. Although asking rents increased in April according to ApartmentList, rent growth was “less than the typical April price change”. Since rents increased sharply last year from May through August, asking rents could be down YoY in July by the ApartmentList measure.
My view is it is likely that we will see a year-over-year decline in asking rents sometime in 2023.
