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Last month, rent’s impact on inflation was lower than it was in March, according to data from the Bureau of Labor Statistics.
It was a moment economists had expected for about a year, and it has implications for everything from interest rates to overall inflation.
The price of shelter makes up about a third of the inflation index. And while the real-time price of new leases has been quickly falling each month for about a year, the cost of shelter was still keeping inflation well above federal targets.
“It’s really the one part of CPI where CPI relies on a lagging indicator,” said Jay Parsons, chief economist for the rental data firm RealPage. “You look at food and gas, energy costs. [In] all these different categories, pretty much, the sticker prices you see are what’s reflected in CPI. Rent is very different.”
For the past three years, real-time rent growth reached record levels, peaked and quickly fell. Meanwhile, the impact that had on inflation was slow to appear in the numbers.
While the Zillow Observed Rent Index showed rent was nearly 17 percent more expensive in February 2022 than a year earlier, rent’s impact on inflation would keep climbing for another year before finally beginning what economists expect will be a gradual drop throughout 2023.
“That has to work its way throughout the market,” said Danielle Hale, chief economist for Realtor.com.
There are signs that that’s beginning to happen.
Rent finally peaked where it counts
March 2023 will likely be a high water mark for rent’s impact on driving up inflation and keeping it high, experts said.
“It’s really playing out as expected,” Parsons said. “Right on schedule we’re seeing, finally, a turndown in the rental inflation one year after we saw that in the private sector data.”
While the year-over-year decline in the April data was small, economists expect the price of shelter will continue falling throughout the year as the federal government releases its inflation data.
“It seems pretty likely that that was the peak for shelter inflation given the weakness that we’ve seen in market rents that goes all the way back to January of 2022,” Hale said.
Rent is still much higher than it was in 2020
While the rate of growth has slowed significantly from record highs, it still grew at two to three times above the historical rent increase every year and is well above where it was before the pandemic.
The typical rent in March 2019 was $1,538 a month, according to Zillow. In March 2023, the typical rental cost was $1,996.
“If you look at it over the last four years you’re still looking at rent that’s up almost 25 percent compared to four years ago,” Hale said. “So it’s not surprising to see rent growth slow down.”
And while the rate of growth nationwide is within a typical range — somewhere between 2 percent and 4 percent, CoreLogic Chief Economist Molly Boesel said — it is still growing very quickly in certain markets.
Rent was 7.7 percent more expensive in Charlotte in March 2023 than a year before, according to the latest report on single-family rent from CoreLogic. (Zillow put rent growth in Charlotte at 6.6 percent.) It’s also growing quickly in markets like Boston and Orlando, according to the reports.
There are no indications that the nation could enter another period of rapid rent growth, Boesel said. In fact, if the nation slips into a recession, rent growth could slow further.
Rent inflation may not fall as fast as rent did
Each of the private companies that keep track of the price of rent in real time has found roughly the same thing.
Rent began spiking shortly after COVID started as people sought more personal space. The rental vacancy rate fell, competition for rentals rose and prices quickly rose.
Then after a peak just over a year ago, the growth in the price of rent rapidly decelerated.
“It’s not going to look exactly the same,” Hale said. “That’s because there are different factors that are driving the CPI shelter measure.”
Several of the private indices track units that have been listed for rent. Inflation tracks all leases, whether newly signed or renewed. It also tracks an estimate of homeowners’ equivalent of rent, which hasn’t peaked yet.
“We have been looking at when that owners’ equivalent of rent will peak, and that is going to be really soon,” Boesel said. “We think that’s going to be June or July of this year.”
The next inflation release on June 13 is expected to show the cost of shelter continuing to fall, the economists said. In the second half of the year, the rate of that decrease might pick up, further helping to drive down inflation.
“Certainly by the winter months and definitely next spring those numbers are going to come down significantly from where we are right now,” Parsons said.
What does rent growth look like from this point on?
With rent growth falling back toward historical levels — and even reversing in markets like Phoenix and Las Vegas — economists say there are more reasons to expect it to remain within a normal range than to spike again like it did during the first years of COVID.
“I’m not seeing anything that can bump it above where it is,” Boesel said.
If the U.S. entered a recession later this year and it put downward pressure on rent and other housing costs, that could change.
“That could cause rents to go below where we think they might be going,” Boesel said.
But after a period of record-high building by multifamily developers, there’s an incoming rush of supply into many markets, giving renters more options and putting downward pressure on rent.
“Household formation would go down. So you’d have fewer households. Maybe they’d double up,” Boesel said. “Maybe younger people move back home. That could cause rents to go below where we think they might be going.”
When can the Fed start lowering rates?
For several months, Federal Reserve Chairman Jerome Powell has indicated it’s too early to talk about cutting rates.
“A decision on a pause was not made today,” Power said. “We’ll be driven by incoming data, meeting by meeting, and will approach that question at the June meeting.”
Rates might not continue going up, but it’s premature to assume the Fed is at a point where it would cut rates.
Experts now say there are signs that the period of rent pushing inflation well above federal targets has come to an end, beginning a period where rent’s impact on inflation should fall for the next year, at least. That could relieve some of the pressure that led the Federal Reserve to quickly raise interest rates, including a 0.25 percent hike this month.
“Most apartment investors and single-family rental investors at this point are not necessarily banking on rates going down this year,” Parsons said. “But there is a lot of cautious optimism that maybe we’ve peaked on rates and, by the time we get to next year, we start to see some modest declines.”
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