There’s a recurring claim that the price of rent will decline as soon as the near-record number of housing units under construction are completed. Let’s investigate the claim.
The price of rent has gone up 28 consecutive months by at least 0.4 percent. Two themes are repeated over and over.
- New leases suggest rent is falling or soon will.
- As soon as the record number of housing units under construction are completed, the price of rent will drop.
Housing Units Under Construction
Housing Starts Drop 6.6 Percent
For discussion of the December New Residential Construction report on which that chart is based, please see Housing Starts Drop 6.6 Percent on Top of Negative Revisions
The point of this post is the line in red, total units under construction, and light blue, completed units.
Random Correlation
The first chart shows random correlation between completed units and the price of rent. Instead, the price of rents tend to drop in recessions.
This makes sense. People are out of work, get evicted, and move back in with parents or take on roommates to cut expenses.
Rents also stabilize or drop in cities that are overbuilt. Otherwise the price of rent tend to rise.
Hotter Than Expected CPI Led by Rent, Up Another 0.4 Percent
For well over two years, economists and analysts said rent was declining or soon would be. But for the 28th consecutive month rent and OER were up at least 0.4 percent.
On January 11, I commented Hotter Than Expected CPI Led by Rent, Up Another 0.4 Percent
Yet Another Groundhog Day for Rent
I repeat my core key theme for over two years now. People keep telling me rents are falling, I keep saying they aren’t. I thought this may finally be the month the rent trend breaks but it wasn’t.
Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.5 percent in December. Rent of primary residence has gone up at least 0.4 percent for 28 consecutive months! [Note: somewhere along the way I got off by a month. Last month I said 28 months but it is 28 months this month].
The “rents are falling” (or soon will) projections have been based on the price of new leases. But existing leases, more important, keep rising.
Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.
Moreover, some of the alleged declines failed to take in seasonal adjustments. Most people move between May and September. It’s harder to fill a lease in December pressuring rents in the winter.
Why Predictions of When the Price of Rent Will Fall Have Been Wrong
For further discussion of the rent setup, please see my January 1, 2024 post Why Predictions of When the Price of Rent Will Fall Have Been Wrong
I address seasonality, five different measures of rent, and how the BLS smooths things out.
Why Are Americans in Such a Rotten Mood?
Those who do rent, most likely the lower economic groups, have been royally screwed by Fed policy.
This addresses the question Why Are Americans in Such a Rotten Mood? Biden Blames the Media
People can cut back on some things but rent and food are not in that list.
For the 36 percent of the nation that rents, Bidenomics has been a complete disaster.
Is the BLS Is Overstating Rent and Exaggerating Inflation?
On December 7, I investigated A Curious Claim that the BLS Is Overstating Rent and Exaggerating Inflation
I provide solid evidence that the BLS has been doing no such thing.
Nonetheless, assume inflation slows along with rent. At some point it’s bound to happen.
The key question then becomes: Was inflation transitory or is it the easing that’s transitory?
The extra money home owners have in their pockets thanks to the Fed and refinancing at 3 percent, coupled with Biden’s regulations, the end of just-in-time manufacturing, and totally inane energy policy all suggest it’s the current easing of inflation that is transitory, not the initial spike.
At some point rent will stop rising so much, or even stabilize or for a while. Perhaps next month.
But I suspect people will read too much into that, unless it’s due to the hard reality of another recession.
Biden’s Claim on Inflation
In case you missed it, please see Is Inflation Down? That’s What President Biden Says
Ask anyone who rents, buys groceries, is in college, buys their own health insurance, or even the average Joe on the street what they think of Biden’s claim.
To me the discussion of new buildings dropping asking price is a miniscule part of the rental market. When our look at renewal of leases on existing that tells the story of pricing. In my experience over 40 years of watching the rental market unemployment is the greatest predictor for fall8ng prices. A northern factor is the large part of the market being mom and pop owners who don’t respond rapidly to the market going up. In the past 3 years I have raised rents approximately 25% which is less than the market ,yet when I make my decision on pricing I factor in the cost of turnover which because of inflation has become a significant cost.
So I price my increase to minimize turnover. There are s3veral hundred class a projects being built yet they do not compete with my moderately priced rentals. Unemployment is what would drive my pricing lower. The availability of class a with its pricing can never compete in pricing. Until all the existing tenants are at market price even the extra supply of new units won’t greatly affect trajectory of rents increasing.
all new is class A housing which commands higher rents(double in our area)
so they have very little impact on our units
besides were growing by avg 33,500(80 per day)
“But for the 28th consecutive month rent and OER were up at least 0.4 percent.”
Interesting how this is correlated to 10M+ illegals running across the border over that same period.
It’s an embarrassment to the entire economic forecasting system that NOBODY will stick their neck out to connect the dots. It’s clear as day.
In the 60’s and the 70′ the multi were constructed in large urban areas like Bklyn
and the Bronx. Between 2010 and 2023, with zero rates, the multi rose from 150K
to 1,000K, mostly in the suburbs and the flyover areas. After the Fed hikes single family dropped. Demand for multi 5+ units in the flyover areas might cont to grow.
For decades completed never fell below 1,000K, but in 2010 they reached 500K.
The low starting point of completed and a new all time high of total might indicate
that demand is still high.
link to econofact.org
So some mention immigration but no one mentioned bi corporate ownership of large number of rental units. The corporate owners can have more control over pricing.
On immigration seems as if Trump deported far fewer than Obama and current administration.
While supply and demand are still crucial to anyone who has taken economics 101.. there are many industry specific factors. First of all, if you look at those monthly increases… They have barely been keeping up with inflation. Not sure if rent is a leading or lagging indicator but it is doing okay against inflation but not exactly going through the roof. What is going through the roof or insurance rates and contractor rates. Try to get a plumber out to your house for under $250. These will continue to keep rents at least a little bit higher if landlords can help it so that they don’t go into the red. New houses will increase the supply but high-end high dollar supply. It could be interesting
I noticed one of the key factors of rising inflation and rent steadily increasing is missing.
Illegal immigration. Illegal immigration. Illegal immigration. Barry Appleseed Obama and FJB and all their illegal immigrants having children. All the children that came up via trains. All these people, millions and millions of people need places to live and grow their families.
Why isn’t open borders every factor in considering why we have steady, rising inflation? Food, clothing, shelter all need to be purchased by either the state, county, Fed taxpayer must foot the bill.
I agree illegal immigration is part of the cause of inflation, however they just can’t rent anywhere. A lot of landlords and apartment complexes don’t rent to people unless they pass a background check and credit check. The landlords also want to verify income. A lot of associations require the landlord to provide this information in order to rent.
What about Section 8 or a program like Section 8 for illegals? The government will guarantee everything, pay 70% each month, and landlords will love collecting above-market rents that uncle sugar is get bamboozled for.
For non citizens, they have to be legal permanent residents to qualify for programs like section 8. I just read over an application for a friend and that’s what it says.
The current waiting list for section 8 is over 10 years in Cook County, IL. A person who was on the waiting list OVER 30 years was just contacted less than 6 months ago that she was at the top of the list. Illegals don’t have jobs with W2’s.
Here was an interesting solution.
link to twitter.com
Illegal immigrants were housed in tents, then moved into an “active school” temporarily, during bad winter weather.
Single family and multi family under construction are : 1,679. Completed : 1,579.
In a healthy market completed are above in construction. In 2023 the total is stalling above.
Home owners who try to sell their houses pull them out after 90 days bc transactions slumped. They might try again, stay put or rent.
Mike, any data on the illegal immigrant flood over the border affecting rents? Would seem reasonable this would pressure rents, especially in sanctuary state urban hive mind locales.
Looks more to me like housing completions drop for the same reason rent falls. Correlation is not causation, so we have to rule out that it is not a third factor (overall demand for example) that is causing both changes before we can begin to assume rent prices drive new housing demand or vice versa.