Your rents are going to keep going up

Apartments for rent california
Pedestrians walk past advertising for new apartments in Los Angeles, California on October 12, 2017

  • Rent prices soared 9.2% in the first half of 2021, tripling the average pace and exceeding the pre-crisis trend.
  • Shelter inflation is set to keep climbing as millennial demand booms, analyst Logan Mohtashami said.
  • That upswing risks turning higher inflation permanent, as rent prices are tougher to rein in.
  • See more stories on Insider’s business page.

Pandemic-era rental deals are gone. Prices are shooting up, and new data suggests they’ll keep climbing at a breakneck pace.

The rally began in the housing market, where a buying frenzy dragged national inventory to historic lows and led prices to surge at their fastest rate in over 30 years. Now it’s spilling over into the rental market.

The median apartment rent in the US rose 9.2% through the first six months of 2021, rental website Apartment List said in a June 29 report. That compares to the typical first-half growth of 2% to 3%. June alone saw the website’s national rental index leap 2.3%.

The typical price nationwide now stands 2% higher than had the pandemic not taken place, according to Apartment List. That overshoot is concentrated in growing markets like Austin and San Diego, as rents in the largest metropolitan areas remain below trend.

“Whereas last year’s peak moving season was halted by the pandemic, this year’s seasonal spike appears to be making up for lost time,” Apartment List economists Chris Salviati, Igor Popov, and Rob Warnock said in a blog post.

Apartment List
Source: Apartment List

The elevated price growth isn’t likely to cool off anytime soon, Logan Mohtashami, lead analyst at Housing Wire, said. Millennials are set to power unprecedented demand over the next three years throughout the housing market. That shift will drive an even bigger gap between supply and demand, the analyst said.

“We never built enough apartments anyway. And now we have the biggest household-formation demographic group in history,” he told Insider. “Whether they’re not buying homes, they still have to live somewhere. So yeah, rent inflation should pick up.”

Rising rents pose a larger-than-usual risk to broad price growth. Shelter inflation is stickier than inflation in other categories, meaning it’s less likely to immediately cool after leaping higher.

The Federal Reserve, the White House, and most economists expect decade-high inflation to cool off as bottlenecks are addressed. Inflation for used cars, food, and utilities is expected to weaken as supply rebounds. Rent prices, however, complicate the consensus outlook. If shelter inflation continues to boom, forecasts for temporarily faster price growth could fall flat.

To be sure, rent prices are highly seasonal, and prices tend to be highest in the summer, according to Apartment List. If prices follow trends seen in 2018 and 2019, prices would fall modestly through the fall and winter. Such declines could line up with a slowing of broader inflation.

But with rents in major cities expected to keep climbing, shelter inflation is a top gauge to watch for hints at whether price growth fades as expected or stays past its welcome.

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Rent for single family homes soared to a 14-year high as the housing boom escalated in March

single family home rentals sale leasebacks
  • Rent prices soared 4.3% year-over-year in March to their highest since 2006, CoreLogic said.
  • The jump comes as potential homebuyers increasingly move into the rental market instead.
  • Rent prices are expected to climb over the next year, which could contribute to inflation remaining elevated.
  • See more stories on Insider’s business page.

The nationwide shortage of new homes lifted selling prices at their fastest-ever rate earlier this year. Now rent prices are following suit.

The cost of renting a single-family home in the US rose 4.3% year-over-year in March, CoreLogic said in a Tuesday release. That’s up from 3% in March 2020 and places rents at their highest level since September 2006.

Phoenix and Tucson led the increase, with prices rising 11.4% and 10.4%, respectively. Atlanta, Las Vegas, and Charlotte followed close behind. Prices for higher-priced homes jumped 5% and drove the bulk of the acceleration. Lower-priced and lower-middle priced homes saw the weakest rent inflation.

Boston saw a nearly 8% decline in rent prices through March. Prices also fell in Chicago and St. Louis, according to the report.

The US housing market has been on a tear over the past year as outsize demand overwhelmed the national supply. Inventory tumbled to record lows earlier in 2021, and while construction has picked up somewhat, a still-elevated sales rate threatens to accelerate price inflation even further.

Surging home prices often drive potential buyers to the rental market; a recent CoreLogic survey showed nearly 70% of consumers citing high home inflation as a reason to rent. But even that option is growing crowded, and burgeoning demand for rentals risks creating a new affordability problem. More than one-third of consumers said rentals in their neighborhood were either not very or not-at-all affordable, CoreLogic said.

Rent’s potential effect on inflation

Soaring rent prices also risk keeping inflation persistently higher. Shelter inflation – which tracks rent prices and owners’ equivalent rents – is only just picking up as buyers pivot to the rental market. Rent inflation is a critical component of broad price growth, as it represents “more cyclical, more persistent, and more inertial sources of price pressures,” Morgan Stanley economists said in a note.

A continued run-up in rent prices could lead nationwide inflation to normalize above 2%, the bank added. That would counter the Federal Reserve’s forecasts for strong-but-transitory inflation that stabilizes at 2%.

Other economic data released this week suggests homebuilders aren’t rushing to address the historic inventory shortage. Housing starts tumbled more than expected in April, cutting into the 20% jump seen in March. Elevated lumber prices and a decline in construction workers likely weighed on the sector. Permits for new residential units edged higher, but the amount of permitted construction that hasn’t yet been started reached its highest level since 1979.

The slowdown comes as the US boasts a monthly home supply of just 3.6 months, just above the record-low of 3.5. After years of underbuilding, strained supply stands to drive price growth even higher as the US economy rebounds.

Economists will get their next glimpse of the housing-market boom on Friday when the government publishes data for existing home sales in April. Contract closings are expected to hold steady at an annualized rate of about 6 million.

Read the original article on Business Insider