The hot rental market is experiencing a cooling which is a good indicator of inflation

WASHINGTON — Renters are on track to get some relief in 2023 as a growing number of indicators suggest that the flamboyant rental market is starting to cool off, a shift that could also help lower decades-high inflation that has sent interest rates soaring.

Rising rental costs have been one of the biggest drivers of inflation over the past two years after annual rent increases peaked at 17% last January, according to Realtor.com data. But economists and industry analysts expect a significant slowdown this year driven by a wave of new apartment construction and more renters remaining amid economic uncertainty.

This shift is good news not only for renters, but for the economy as a whole. A slowdown in rent increases could help moderate inflation as shelter costs make up a third of the Consumer Price Index, one of the metrics the Federal Reserve uses to gauge whether it will continue to raise interest rates. These higher interest rates have made it more expensive for consumers to borrow money to buy expensive tickets, such as a car or a house, and for businesses that need to take out a loan to expand.

“The balance of power in the rental market has really shifted very quickly to renters,” said Jay Parsons, chief economist at real estate technology firm RealPage. We’ve seen that rental growth has really slowed. We now have four consecutive months where new leases are actually down month over month. The market has actually changed fundamentally.”

In the last several months of 2022, online real estate companies Zillow, Redfin, and Apartment List have recorded significant drops in their rental asking prices.

The cooler rental market hasn’t figured up in federal inflation data yet because those numbers reflect what renters are paying on existing leases rather than what landlords are currently charging new renters, resulting in a 12-month delay in federal data, the researchers found. The Consumer Price Index, for example, showed a 0.8% increase in how much consumers pay for rent from November through December, while Zillow found a 0.3% decrease in asking prices over the same period.

But as renters enter new leases at lower increments or find a better deal on another property, the slowdown will start to show in federal data this spring, said Jeff Tucker, chief economist at Zillow.

“We saw year-over-year growth at our rental index peaking last February, and it has slowed since then,” Tucker said. “We’ve seen a monthly decline in our rental index in the past few months, so this is a promising look ahead as CPI metrics for rents will likely turn the corner sometime this spring and start to slow.”

Even before falling rents were factored in, inflation showed signs of improving, helped in large part by lower gas prices. The consumer price index fell 0.1% in December from the previous month, the largest monthly drop since the start of the pandemic. Prices are still up 6.5% from a year ago, although they are down from 9% in June.

Helping to bring down rents is a general slowdown in the number of times people move compared to the change caused by the pandemic seen over the past two years. U-Haul saw one-way moves drop in 2022 from the record numbers it saw in 2021 and 2020, according to a company spokesperson. This trend is set to continue into 2023 as more people are expected to remain put amid economic uncertainty and fears of a recession.

“It takes some confidence in yourself, the economy, and your job to go and sign a 12-month lease or buy a house,” Tucker said. “These big commitments are kind of a vote of confidence in how things are going to play out over the next 12 months, and a lot of the data shows that people didn’t feel that confident in the last several months of 2022.”

Rents also varied widely based on geography, with some of the hottest markets experiencing a severe slowdown while affordable markets were some of the few places that saw rent increases. In December, rents fell 0.9% in Las Vegas and 0.8% in Dallas, while Cleveland, Pittsburgh and Charlotte, North Carolina, were among a handful of cities that saw rents increase last month, according to Zillow.

Falling rents have also led to a wave of new apartment buildings opening over the past year. In 2021 and 2022, more than 800,000 new apartments have come to market with residential building construction at its highest levels in 50 years.

But not all tenants will feel the same level of relief from this building boom. Due to the high cost of new construction, the vast majority of new buildings to come to market will target the wealthiest tenants. It will mean increased competition among luxury buildings as landlords offer incentives such as a month of free rent or gift cards worth hundreds of dollars.

That competition isn’t expected to seep into the lower or mid-end of the market anytime soon, though the high cost of construction has made it difficult for developers to build affordable rental buildings unless they receive local or federal subsidies, which real estate economists said are That was limited.

“It’s really difficult for developers to build because of the high cost of land, labor, materials, and everything else to build affordable housing without these subsidy programs,” Parsons said. “So while we are seeing the highest levels of construction in 40 years, the vast majority of this is luxury rental properties that are going to be rented to six-figure households. We’re not really meeting that demand on the lower end of the market, unfortunately.”

Leave a Comment