Everywhere you look, America’s housing crisis is getting worse

Home for sale
On a month-over-month basis, prices rose 2.3% in June. That’s the same amount prices typically rise in an entire year.

  • Home sales have slowed, but buyers waiting for prices to cool were out of luck in June.
  • Home prices surged at the fastest annual pace since 1979 as demand pressures endured, CoreLogic said.
  • Rentals aren’t better. Prices leaped 2.5% in June, to well above the pre-pandemic trend, Apartment List said.
  • See more stories on Insider’s business page.

Housing prices got out of hand early in 2021, so Americans went on something of a strike.

They simply thought the deals weren’t good enough, and home sales subsequently slowed from the frenetic pace seen earlier in the pandemic. The market is still far from normal, though, and by many measures, the affordability crisis is only getting worse.

The stark imbalance between the number of homes available and the number of people wanting to buy continued to lift prices at an astonishing rate into summer. Prices rose 17.2% year-over-year in June, housing data company CoreLogic said Tuesday. That’s the largest one-year increase since 1979, though the measure is somewhat skewed by the much lower prices seen earlier in the pandemic.

On a month-over-month basis, prices rose 2.3% in June. That’s how much prices typically rise in an entire year.

The market remains rife with prospective buyers and too few sellers. The rate of inflation risks pushing less wealthy Americans out of the market.

“With plenty of cash on the sidelines, along with very low mortgage rates, prices are heading up and affordability will become a more acute issue for the foreseeable future,” Frank Martell, president and CEO of CoreLogic, said in a statement.

The homebuying spree is bleeding into the rental market

Rents rose 2.5% from May to June and sit 11.4% higher than they were at the end of 2020, Apartment List said in a July 26 report. By comparison, rent growth from January to July averaged just 3.3% in the three years before the pandemic.

Apartment List

The recent surge in rent prices places costs “well ahead” of the growth trend seen in 2019, Apartment List economists Chris Salviati, Igor Popov, and Rob Warnock said in the report. The price boom is taking place in “virtually every major market across the country,” they added. And while rents remain below their pre-pandemic levels in 13 major markets, prices are rebounding quickly, according to the report.

“As economic recovery continues to gain momentum, we may be seeing the release of pent-up demand from renters who had been delaying moves due to the pandemic,” the team said. “Whereas last year’s peak moving season was halted by the pandemic, this year’s seasonal spike is more than making up for lost time.”

UBS says there’s some reason to be optimistic

While prices have leaped higher, spending should soften as inventory bounces back in the months ahead, UBS economists led by Ajit Agrawal said in a Tuesday note. That’s already shown up in homebuyer sentiments, which soured through 2021 amid the historic price surge. Pending home sales also slowed, suggesting high prices are finally slamming the brakes on market activity.

Separately, the population shift away from cities has started to fade, the team said. The start of the pandemic saw Americans move away from cities and flock to exurbs, areas more rural than suburbs that offer more space and cheaper housing.

Yet the trend slowed somewhat in May and June as reopening led businesses to call employees back to their offices. That return-to-work should reverse out-migration from many cities and, in turn, cool booming demand in suburban and rural neighborhoods, the economists said.

Still, that reversal isn’t likely to play out until the end of the year, according to UBS. Buyers, then, are best off staying patient as economists forecast weaker demand, rebounding supply, and a fizzling-out of the exurban migration.

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The average person earning minimum wage has to work 79 hours a week to afford a one-bedroom apartment

McDonald's fight for $15 wage
An employee of McDonald’s protests outside a branch restaurant for a raise in their minimum wage to $15 an hour, in Fort Lauderdale on May 19, 2021.

  • Rent is unaffordable for the average minimum-wage earner in the US, according to a recent report.
  • Though the Fight for $15 has gained traction, $15 an hour often isn’t enough to afford housing.
  • Low-wage workers will continue to struggle after the pandemic ends.

For the nation’s minimum-wage workers, even working two full-time jobs sometimes isn’t enough to afford rent, according to a new report from the National Low Income Housing Coalition.

The average minimum-wage worker would have to work 79 hours a week to afford a modest one-bedroom rental and 97 hours a week to afford a modest two-bedroom rental, hours that would be difficult for a single person and nearly impossible for single parents.

“People who work 97 hours per week and need 8 hours per day of sleep have around 2 hours per day left over for everything else – commuting, cooking, cleaning, self-care, caring for children and family, and serving their community,” the report stated. “Even for a one-bedroom rental, it is unreasonable to expect individuals to work 79 hours per week to afford their housing. For people who can work, one full-time job should be enough.”

The federal minimum wage is $7.25 an hour and hasn’t increased in over a decade. Though the Fight for $15 – a nationwide campaign to raise the minimum wage – has gained momentum with some major companies and states instituting $15 minimum wages, even a $15 hourly wage isn’t enough to lead a comfortable life.

According to the report, an individual would have to earn $20.40 an hour to afford the average modestly priced one-bedroom rental and $24.90 for a two-bedroom apartment, without spending more than 30% of their income on housing.

“Stable, affordable housing is a prerequisite for basic well-being, and no family should live in danger of losing their home,” the report stated.

In more expensive housing markets, workers must earn even more to afford rent. In New York state, where the average housing wage is $34.03 an hour, an Amazon employee making $19.30 an hour in New York City has lived in her car since 2019 because she can’t find affordable permanent housing.

Although wages overall jumped during the pandemic as businesses struggled to fill open positions, salaries for people already in the workforce didn’t go up. Even pre-pandemic economic conditions were difficult for low-wage workers, and the report predicts that workers will struggle even more now to pay off debt accumulated during the pandemic.

“Even if economic recovery is robust and sustained, low-wage workers will continue to struggle.”

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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.

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Rent’s big comeback could be the thing that makes stronger inflation permanent

San Francisco apartment tour interior
Manager Justin Sielbach gives a tour of a unit at the 100 Van Ness apartment building on Friday, March 19, 2021 in San Francisco, California.

  • Shelter inflation – which tracks rent prices – is set to boom just as price growth elsewhere cools.
  • The jump could lead inflation to normalize above the Fed’s long-term target of 2%, Morgan Stanley said.
  • Climbing home prices and the end of payment forgiveness will likely drive shelter inflation higher.
  • See more stories on Insider’s business page.

Rent prices tumbled at the start of the pandemic and are only just now on the rise. But where inflation in other pockets of the economy is expected to cool off, rent might just keep climbing.

The Federal Reserve, Biden administration officials, and much of Wall Street see elevated overall inflation eventually moderating as the economy settles into a new normal. The last inflation report, while stronger than expected, showed price growth picking up in services closely linked to reopening. The consensus holds that as such bottlenecks and pent-up demand fade, inflation should moderate, but “shelter inflation,” or rent, could be the big exception to that.

Rent prices are flashing “signs of more persistent inflationary pressures” on the horizon, Morgan Stanley economists said in a Sunday note. Shelter inflation – which covers rent and owners’ equivalent rents – is only just picking up after prices cratered through the pandemic.

Goldman Sachs echoed its peer in a Monday note, saying the “special factors” that held down shelter inflation during the health crisis will soon ease up and drive prices higher.

The shelter-inflation gauge is critical for broader inflation, since it represents “more cyclical, more persistent, and more inertial sources of price pressures,” Morgan Stanley said. And as shelter inflation accelerates through 2021, it could lead broader inflation to normalize above 2%, the team led by Ellen Zentner added.

Shelter inflation
Source: Goldman Sachs

Such an outcome could be worrisome for the Fed. The central bank has said it aims to let inflation run above 2% for some time before looking to pull it back to that threshold for the long term. Inflation settling above that level could force the Fed into an unforeseen corner.

Forecasts suggest soaring shelter inflation could also push inflation expectations permanently higher. Shelter prices are expected to grow 3.8% year-over-year by the end of 2022, Goldman economists said. Inflation will accelerate further and land above 4% in 2023, exceeding the highs of the last economic expansion.

With renters making up nearly one-third of the housing market, such strong inflation could spark intense price concerns. Elevated inflation expectations can drive real inflation higher, as businesses tend to raise prices and workers ask for higher wages when they expect price growth to accelerate.

Skyrocketing home prices could add to the sector’s price pressures, the team of Goldman economists led by Jan Hatzius said. A historic shortage of home inventory and surging demand led home prices to climb at their fastest-ever rate in February, according to the Federal Housing Finance Agency. Although home prices don’t directly affect shelter inflation, Goldman found that 5% to 15% of home-price growth eventually spills over into shelter inflation.

To be sure, shelter inflation counts for just 20% of the core Personal Consumption Expenditures index and 40% of the core Consumer Price Index, two of the most popular broad inflation gauges. It would take considerably strong shelter inflation to pull both indexes to worrying levels.

Still, the component is one to watch as the country reopens, Goldman said. The end of pandemic-era payment forgiveness will likely skew data later this year, as will a tighter labor market. If those factors can fuel stronger shelter inflation expectations, broad inflation could follow.

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