An ongoing boom in apartment construction has helped slow down rental inflation — but renters shouldn’t expect prices to drop dramatically from their pandemic-padded highs. That means affordability will remain the dominant narrative in rental housing in 2024.
The combination of a pandemic economic rebound, a longtime shortage of rental housing stock and high interest rates on mortgages created a perfect storm for rental prices to spike beginning in 2021 and peaking last spring, inflation data shows. Since then, price growth has steadily declined, which could provide a modicum of relief for renters.
As it stands, rent prices nationally are almost 30% higher than before the pandemic. In January, though, average rents were up only $1 higher than December 2023, and declined in some markets.
Although housing cost trends can vary a lot regionally, a decline in nationwide rental inflation protects most renters from big price hikes the next time they sign a new lease, says Orphe Divounguy, a senior economist at the real estate website Zillow. That’s important because Divounguy says cost still remains the No. 1 factor for renters.
“They care more about staying within budget than they do about anything else,” says Divounguy. “They care less about if it’s an apartment or a house, the number of bedrooms or bathrooms — it’s about the price.”
Although affordability is the prevailing theme this year, Divounguy says he also expects 2024 to be the year of “the big reset” in the housing market — in other words, a period of relatively stable prices for both buying and renting.
“In 2022 we had the interest rate shock. In 2023 we had a big pause because people just didn’t know what to do. And now we’re starting to see a normalization in the housing markets when it comes to prices and rents,” he says.
Inventories of homes for sale remain lower than pre-pandemic averages, federal data shows. Due to high mortgage rates, many current owners are staying put, which has a ripple effect on the rental market. In the end, there still aren’t enough homes to go around.
Rental housing built in the construction boom comes to market
In the early days of the pandemic, new multifamily apartment construction slumped to rates not seen since the Great Recession. But there was a swift rebound and by December 2021, building permits hit a high unseen since April 2006, according to analysis of data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development retrieved from the Federal Reserve Bank of St. Louis' FRED database.
But since the 2021 spike in multifamily construction, it’s taken more time than usual to complete projects. An analysis of Census Bureau data by the National Association of Home Builders (NAHB) released in August 2023 shows the length of time to complete the construction of multifamily housing was 19.8 months — 2.3 months longer than in 2021. The NAHB report cites supply-chain lags and skilled labor shortages for the delays.
However, once the multifamily construction projects in the existing pipeline are complete and the overall housing supply increases, it’s likely that price growth will slow.
Again, growth cooling doesn’t mean price drops. But there is one hopeful indicator that the market is tipping more favorably toward renters, says Divounguy: Rental advertisem*nts are increasingly offering concessions. Those could include things like a month of free rent or parking, intended to sweeten the deal for tenants. That means the rental atmosphere is getting more competitive.
The single-family home rental market still lags
While a growing supply of units could reduce prices for renters in multifamily buildings, single-family construction hasn’t seen quite the same degree of expansion. And those renters face higher price growth than those living in multifamily homes.
Multifamily rental prices grew 2.7% from January 2023 to January 2024 compared with single-family rental prices, which grew 4.7% over the same period, according to Zillow.
Divounguy says elevated single-family rents have persisted due to a postponement in homebuying among one of the largest groups of would-be owners: millennials. “They’ve been delayed because of affordability constraints,” he says. “They went from bidding wars in 2021 to high interest rates, and that’s making affordability very, very tough for some young families.”
But this group is less interested in renting in a multifamily building, says Divounguy. They want single-family homes, even though those aren’t the types of rentals coming to market.
There may be fewer new construction projects to come
Since the December 2021 peak in building permitting, data shows a sharp decline. And the latest federal data via FRED finds that the number of building permits in January 2024 is back at pre-pandemic levels.
“Unfortunately, with interest rates still somewhat elevated, builders may take a little bit of a step back because of the higher financing costs for builders and high mortgage rates for buyers,” says Divounguy. “So that to me is the most concerning thing, because I think we still have a long way to go to close the country's nationwide housing unit deficit.”
Cooling rents still aren’t showing up in inflation data
Rent price data collected and analyzed by private companies like Zillow has shown cooling rent growth since last spring. But that slowdown has yet to surface in inflation data, according to the latest report on inflation — the consumer price index (CPI) — released on Feb. 13 by the Bureau of Labor Statistics. Shelter, which includes rent, is still the largest contributor to inflation, as measured by the CPI.
Current measures of inflation, like the CPI, don’t reflect present market conditions. There’s a lag, primarily due to the renting cycle of lease renewals. Since most leases last around a year, rental costs stay static for that year. But when the lease ends, a more up-to-date picture of the rental market appears. Still, the lag seems to be lasting longer than expected
At a press conference following the Federal Reserve’s decision to pause the federal funds rate at its January meeting, Fed Chair Jerome Powell said the question is: When will lower market rents begin to be reflected as a measure in inflation? “We think that’s coming and we know it’s coming, it's just a question of when and how big,” said Powell.
Divounguy says renters are “feeling the pinch” since rent prices are still higher than they were pre-pandemic. “But the slowdown in rent growth means that wages will have the opportunity to catch up,” he says. “So if your rent increase was 2.7% this year, but your wages grew at 4.2% this past year, then you know you’ve got a little bit of breathing room. It helps.”
Most rent remains unaffordable
Wages haven’t kept pace with rent increases in decades, according to a recent report on rental housing in the U.S. by the Joint Center for Housing Studies of Harvard University. When adjusted for inflation, median rents in 2022 were 21% higher than they were in 2001. During that same 21-year period, incomes among renters rose 2%.
The Harvard report found that in 2022, half of all renters spent 30% or more of their income on rent. By federal standards, spending 30% or more of your income on rent renders a household “moderately cost-burdened.”
From 2019 to 2022, there was an increase in renters who were considered “severely cost-burdened,” as in, they spent 50% or more of their income on rent. That number hit an all-time high of 12.1 million in 2022 compared to 10.6 million before the pandemic.
The U.S. needs way more rental housing
Persistent housing shortages are fundamentally what’s keeping rental inflation so high, according to a June 2023 Zillow report on the housing affordability crisis. From 2015 to 2021, the housing stock in the U.S. — for owning and renting — grew by 6.3 million. But over the same period, 7.1 million new households were formed. Without enough housing to meet demand, costs for available units rise.
The disparity between housing availability and housing need is worse for those with low incomes. The availability of low-rent units has dropped, according to Harvard’s report on U.S. rental housing. Since 2012 there’s been a 2.1-million-unit decline in affordable housing — that’s units priced at $600 per month, which is the maximum affordable rental price for renters whose annual incomes fall below $24,000. The report argues that the pandemic accelerated this long-term reduction in affordable housing availability.
Divounguy says he’s hopeful the Federal Reserve will cut interest rates, which will help ease the homebuying market and make it more attractive for builders to construct new homes. He also says he remains optimistic that, in this strong labor market, wages will increase as well. If the stars align, those conditions could finally give renters more significant relief.
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