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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