Why rent inflation is so high

A new riddle in our economy where everything is weird: home builders say the United States is in a “housing recession”. But rents are at an all-time high and official rent inflation continues to rise.

If you’re a new tenant thinking you’ve never seen anything like 2022 in your life, you’re not alone. In Manhattan, the average monthly rent has soared to a record $5,000. In Miami and Tampa, typical rent is up nearly 50% since before the pandemic, and nationally, the median monthly rent just topped $2,000 for the first time ever.

“Our annual index of rent growth has been pretty steady for the past few years, going from around 3% to 4%,” Jeff Tucker, senior economist at online real estate market Zillow, told me. “This year, it has reached a record 17%. So the time series of rent growth looks like a flat line followed by the start of a huge roller coaster.

The rental market is just a roller coaster inside the amusement park that is the American real estate landscape. Since the start of the pandemic, housing prices across the country have soared to all-time highs as Americans fanned out in search of more space. In the so-called Smile States, the sunny crescent that runs from the Carolinas to Texas and up through the mountains of the West, no one is smiling: Rents have skyrocketed in many of the same metro areas where housing costs have risen , as as Charlotte, North Carolina; Atlanta; Austin, TX; and Salt Lake City.

Two mysteries are at work here. The first is how the US rental market has gotten so crazy. The second is how rent inflation works and why we are likely to see official rent inflation continue to rise several months after private markets, such as Zillow, suggest the worst is over.

Land let’s start with the underlying conundrum: What happened to the US rental market?

The answer is largely a matter of supply and demand, thanks to “household formation”. Last year, Americans who had previously hunkered down with friends or family during the pandemic suddenly decided to have their own homes. Singles have become particularly anxious. Single-person households accounted for more than 80% of new household units that have formed since 2020, according to Rob Warnock, analyst for online market Apartment List. Young singles led the way: The number of Gen Z adults living alone nearly doubled between January 2020 and early 2022. When they got their own homes, they sparked a wave of household formation that wrought unprecedented pressure on the rental market.

Young families also flocked to the housing market in 2021 and early 2022, armed with extra cash from government stimulus and enough savings for a reasonable down payment. But when the cost of buying a home skyrocketed in 2021, many households were no longer homeowners, so they turned to the rental market instead.

As the number of new households, including young and old, singles and couples, grew faster than the inventory of available homes, vacant rental units fell to a record low. Result: rental costs have skyrocketed. “Lower vacancy rates naturally lead to higher rents, as landlords know tenants are struggling to find their next rental unit,” Tucker said. “When all the seats in the game of musical chairs are taken, landlords don’t feel much competitive pressure to lower rents.”

Another factor to consider in the overheated housing market is that many Americans’ attitudes toward space have changed during the pandemic. Not only did singles want space away from roommates; knowledge workers wanted an extra room for Zoom meetings. A near-record vacancy rate for rental accommodations during a time when America’s population is growing slower than ever might seem like a strange phenomenon, but when a slow-growing population is asking for a lot more space per personwhich puts pressure on housing markets.

NOThere for one a slightly wackier mystery. Depending on who you ask, rent inflation is either falling or rising.

Zillow will tell you that the inflation rate for quoted rents likely peaked earlier this year and is now falling. (When inflation peaks, that means prices continue to rise, but at a slower rate.) But if you check the federal government, you’ll find that the consumer price index for rents continues to rise. increase. In July, annual CPI rent inflation hit its highest level since 1986.

Why, then, is Zillow saying rent inflation is going down if the government says it’s going up?

To solve this conundrum, the best place to start is to understand that rents are different from almost all other prices. When the price of oil or grain goes up, everyone pays more for that good at the same time. But when the advertised rents for available apartments increase, only new tenants pay these prices. At any given time, the majority of tenants surveyed by the government are paying rent at a price set earlier.

So when advertised rents go up or down, those changes can take months to be reflected in national data. How long, exactly? “My hunch is that it takes six to eight months to go through the system,” Michael Simonsen, the founder of housing research firm Altos, told me. This means that we can predict two things for the next six months: first, that official measures of rent inflation will continue to set 21st century records for several more months, and second, that the rent CPI should peak this winter or early next year.

This creates a strange but important challenge for monetary policy. The Federal Reserve is expected to react to real-time data to determine whether to continue raising interest rates to dampen demand. But a big part of the rise in core inflation over the next few months will be rental inflation, which has likely passed its peak. The more the Fed raises rates, the more it discourages residential construction, which not only reduces overall growth, but also takes new homes off the market. In the long run, scaled-down construction means fewer homes, which means higher rents for everyone.

To sum up: This is all quite confusing! The annual inflation rate for new rental listings has almost certainly peaked. But the official The CPI rent inflation rate will certainly continue to rise for another quarter or more. This means that in a few months, if you’re listening to the news or logging on, someone somewhere will be shouting that rent inflation is out of control. But that exclamation could be equivalent to that of a 17th-century citizen going mad over something that happened six months earlier – the news simply took that long to cross land and sea.

In an economy where everything is weird, few things are weirder than rent inflation.