Deceleration When?
In his testimony to Congress today, Fed Chair Jerome Powell said “And while housing services inflation remains too high, the flattening out in rents evident in recently signed leases points to a deceleration in this component of inflation over the year ahead.“
Powell might be right but notice the key phrase “deceleration in this component of inflation over the year ahead.”
A deceleration? OK, How much? When?
Analysts, not this one, have been predicting the price of rent would start decelerating many months ago.
Mish Flashbacks
- Oct 31, 2022: Rent Prices Have Declined Two Straight Months, But What Does It Mean? Rent prices are declining month-over-month but don’t read too much about inflation into the decline.
- December 8, 2022: Ignore the Pundits, Don’t Expect Big Declines in the Price of Rent. The price of rent appears to be falling rapidly. But some of that is seasonal, the rest is likely a mirage.
- January 5, 2023: National Rent Prices Decline Again, But Reports Are Very Misleading. Apartment List reports the fourth consecutive drop in apartment rent prices but that may not translate to your next lease.
- February 2, 2023: National Rent Prices for New Leases Drop for the 5th Month. The price on new apartment leasers declines again, but when do existing renters get a break?
This is the 6th month now people have been predicting a slowdown in the price of rent. Here are the results from the last nine months.
- May 2022: 0.6
- June 2022: 0.8
- July 2022: 0.7
- August 2022: 0.7
- September 2022: 0.8
- October 2022: 0.7
- November 2022: 0.8
- December 2022: 0.8
- January 2023: 0.7
National Rent Report
Please consider the latest National Rent Report by Apartment List.
Our national rent index increased by 0.3 percent over the course of February, marking a return to positive rent growth after five straight month-over-month declines. This month’s increase is of a similar magnitude to the typical February price change that we saw in pre-pandemic years. After a few months of record-setting price declines, it appears that rental demand is rebounding in line with the usual seasonal trend.
Year-over-year rent growth is continuing to decelerate, and now stands at 3.0 percent, its lowest level since April 2021. Year-over-year growth is now pacing just slightly ahead of the average rate from 2018 to 2019 (2.8 percent), and is likely to decline further in the months ahead.
Rents increased in February in 62 of the nation’s 100 largest cities. Among large metro areas, Boston experienced the nation’s fastest rent growth this month with an increase of 1.5 percent. The Boston metro now also ranks among the top 10 for fastest year-over-year rent growth, even as it continues to be among the nation’s most sluggish rental markets when measured over the course of the pandemic as a whole. Over the past six months, no large metro area in the country has experienced positive rent growth.
Are Rents Declining?
It’s not that the Apartment List data is wrong. Rather, it has to do with what they measure.
First, let’s consider how things look year-over-over-year.
Percent Change From Year Ago
Chart Notes
- The National Rent Price is from ApartmentList.Com.
- OER stands for Owners’ Equivalent Rent, the price one would pay to rent one’s own house from oneself, unfurnished and without utilities.
- Rent of Primary residence is just what it sound like, typical rent. That number and OER are from the BLS.
Apartment List Stated Methodology
- “We calculate growth rates using a same-unit analysis similar to Case-Shiller’s approach, comparing only units for which we observe transactions in multiple time periods to provide an accurate picture of rent growth that controls for compositional changes in the available inventory.”
- “We capture repeat transactions – when a single apartment gets rented more than once over time – and check whether the transacted rent price has changed between those transactions.”
- “Rent estimates reflect prices paid by renters, not list prices for units that remain vacant.”
Three Key Difference to BLS
- Although Apartment List uses repeat rents of the same or similar unit and prices are are actual prices, not asking prices, it only shows new leases, not repeat leases.
- Because new leases on vacant units rise much more rapidly than existing leases, its year-over-year numbers rise or fall faster and in greater magnitude.
- The National Rent price reflects year-over-year changes, but in reality, people pay the same amount of rent for 12 months then there is one big price jump.
Seasonal Tendencies
The strong seasonal tendencies of Apartment List are smoothed over by the BLS every year.
To explain the magnitude change in 2022 including a record 1 percent decline in November, just look at the massive spikes that preceded it.
Remember, ApartmentList reflects new leases not renewals of existing leases. With Covid, there was a huge increase in work-at-home and huge demand from people escaping the cities to the suburbs.
Finally, note the time lag between ApartmentList and the CPI.
Reality Check
The above charts provide a needed reality check to those who think rent prices are about to plunge based off Apartment List data.
Note that each box in my lead chart is two months. It takes a full year for national spikes to filter through because of BLS smoothing.
In October of 2022 I commented “The above chart provides a needed reality check to those who think rent prices are about to plunge based off Apartment List data.”
And here we are, with national rent prices heading back up.
Apartment List Conclusion
February’s 0.3 percent increase has brought an end to a five-month stretch of record-setting rent declines. That said, year-over-year growth fell again to 3 percent, and will likely decelerate further in the months ahead. And even if demand continues to rebound, a strong construction pipeline should temper rent growth for the remainder of the year. Prices may not fall further, but they are also unlikely to increase significantly.
Vacancies
Looking Ahead
Vacancies are climbing but they are still just about where they were pre-pandemic.
There is a huge supply of apartments under construction but what’s the impact?
New Home For Sale by Stage of Construction
Stage of Construction Details
- Of the purported 439,000 homes for sale, 91,000 have not even started, nor are they likely to in this environment. A mere 67,000 are actually completed.
- To be generous, there are 348,000 homes for sale, that have at least been started, with 280,000 under construction and a mere 67,000 actually completed.
Total Housing Units Under Construction
Construction Questions
- Is this supply increase enough to pressure the price of rent?
- Are the units in the right places enough to matter?
- If so, when, given national rent prices are again on the rise?
For more discussion, please see New Home Sales Rose for the Second Month.
No Rebound in Existing Home Sales Despite a Drop in Mortgage Rates
Meanwhile, there is No Rebound in Existing Home Sales Despite a Drop in Mortgage Rates
It’s new, not existing, home sales and construction that will impact rent prices. Is completion happening at a fast enough pace?
Ultimately, a slowdown in the price of rent will happen.
But with housing nearly a third of the CPI, neither a 50 percent decline in year-over-year price of 8.6 percent, nor a 50 percent decline in the monthly rate of 0.7 percent will satisfy the Fed.
For more on Powell’s message today, please see Powell’s Hawkish Speech to Congress Sends Interest Rate Hike Odds Soaring
This post originated at MishTalk.Com.
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