Housing inflation is going nowhere but up

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Tuesday, March 15, 2022

Rapid rent growth will persist

The rent is too damn high. Once only referring to a single-issue political party led by former New York City mayoral candidate Jimmy McMillan in the 2000s, the phrase now resonates across the U.S.

Rent growth, not just soaring energy prices, is doing its part to push inflation to a 40-year high and there’s little sign of it letting up. Rent inflation rose at a seasonally adjusted annual rate of 4.2% (highest since 2007) and an increase of 0.6% month-on-month (highest level since 1987), according to the Bureau of Labor Statistics' Consumer Price Index (CPI).


Much of the gain was fueled by four Sun Belt cities — Miami, Dallas, Denver and Phoenix — that experienced a surge of inbound migration during the COVID-19 pandemic as people who could work remotely sought more space in lower cost, less dense U.S. metropolitan areas.

The CPI rent print is a lagging market indicator (it doesn't measure rent for new lease activity), but recent reports from the likes of Apartment List and CoreLogic reveal there’s more upside. Even in major cities like New York, where rents tanked at the height of the pandemic as a result of a mass exodus of residents, rent prices have soared to new highs and staged a comeback to tenants’ dismay. In March, median rents in New York stand at $2,045 for a one-bedroom and $2,152 for a two-bedroom.

Single-family rent extended record growth for the 10th straight month in January, up 12.6% from a year ago, according to new data to be released by CoreLogic this morning. Sun Belt cities, led by Miami with a nearly 40% annual increase, registered the largest gains. The results echo Apartment List’s most recent report for February, which revealed annual rent growth was 17.6% for all housing types and a 0.6% monthly increase that still exceeds pre-pandemic levels. Apartment List’s vacancy index sits at 4.5%, well below the 6% pre-pandemic norm.

Apartment List
Annual rent growth was 17.6% in February, according to Apartment List.

“Vacancy rates are at their lowest level in a generation … Landlords and property managers are seeing their costs go up,” said Frank Nothaft, chief economist at CoreLogic, adding that landlords will be passing those higher expenses on to consumers. “Rents will go up.”

Sarah House, senior economist at Wells Fargo & Co., told Bloomberg she doesn’t expect rent prices “to peak until maybe the third quarter of this year.”

Fueling the rental demand are historically low number of homes for sale and skyrocketing home sale prices. A lot of consumers are simply "priced out of the for-sale housing market and will have to continue renting," Marcus & Millichap CEO Hessam Nadji recently told Yahoo Finance Live.

Surprisingly, according to RealPage, a property-management software provider to landlords, some consumers are actually keeping up with housing costs. "New renter incomes were at $70,116 nationally, up 11% above the pre-pandemic high," said RealPage. And in another positive sign, rent-to-income ratios remained in the low 20% for the average renter household signing a new lease.

RealPage added: “Renters are bringing big incomes and they are paying rent on time. We’ve seen this not only in our own data, but in reporting from all the publicly traded rental housing REITs.”

That may be the case. Still, housing affordability remains a major nationwide problem, pushing some states to ponder enacting rent-control measures to stymie rapid growth.

“Cooling will take some time ... It will come through additional rental supply coming into strong multi-family rental construction,” said Nothaft, adding that this past year there was a pick-up in investors purchasing single-family homes intending to rent them out. “This adds to the rental stock. More inventory will work to moderate rent growth over time.”

And don’t expect the Federal Reserve’s move to tame inflation with a 25-basis point interest-rate hike, likely to come tomorrow, to do much. Even if they raise interest rates seven times this year (as predicted by Goldman Sachs), “it should not trigger a collapse in rents,” said Omair Sharif of Inflation Insights. “The big debate right now” is how high will rent inflation go.

Sharif predicts an annual rate of 5%-5.5% by the end of this year, while folks like the San Francisco Fed and former U.S. Treasury Secretary Larry Summers project the rate of rent inflation will increase to 7.1% and 7.4%, respectively, in December 2022.

By Amanda Fung, editor at Yahoo Finance. Follow her at @amandafung

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