There's a new twist in the fast-moving housing market with welcome news for renters: After an 18-month period of red-hot rent growth, the apartment market has turned ice cold over the past few months. It's another area of the economy that's in the process of unwinding after experiencing an unsustainable boom in activity and price growth during the pandemic. And that's good news for everyone (unless you're a landlord).
There was evidence a couple months ago as pricing cooled that something was changing in the rental market. At the time it was hard to tell whether this was just normalization after a period of elevated growth, or if normalization would give way to weakness. Two months later it's clear that we're seeing real sluggishness rather than just the softness you would expect at a seasonally slower time of the year.
Three years prior to the pandemic, in 2017 through 2019, apartment rents fell an average of 1.3% between September and November, according to Apartment List, a nationwide platform for rental listings. Last year, average rents actually rose by 2.7% during that three month period, reflecting the historically strong year for the rental market. But in a sharp reversal, this year rents fell by 2.2% during September, October and November — much weaker than we saw even prior to the pandemic. That raises the possibility that we might not see any rent growth at all next year as the market tries to find balance.
On top of falling rents, vacancies are surging, albeit from historically low levels. In the Apartment List data, the vacancy rate has increased to 5.7% from 4.1% over the past year, with the biggest jumps coming over the past few months. This is still below the 6.7% average seen in 2017-2019, but we should expect it to rise in coming months as winter tends to be a slow time for leases.
This shift in the rental market is likely going to come as a shock to both tenants and landlords. We're used to boom-bust cycles in lots of things — oil, automobiles the purchase market for homes — but apartment rentals aren't typically like that, particularly when we haven't yet seen a meaningful change in the labor market.
That gets to unique dynamics related to the pandemic that we haven't seen in living memory. A public health emergency led lots of people to make different living decisions in 2020, and that led to a surge in new leases beyond what employment or population growth would have suggested. In response, landlords raised rents aggressively because we didn't get a corresponding increase in rental supply.
But as the public health emergency passed — and price shocks have rattled prospective renters — people are once again making different living decisions. This time that's translating to a far weaker-than-expected rental market over at least the next few quarters, even before taking into account the possibility of a recession or significant job losses.
If you're a renter, needless to say, this is great news. In 2021 rents rose much faster than incomes, squeezing household budgets. That's no longer the case. In growing numbers of metropolitan areas wages are rising faster than rents, which should relieve some of those budgetary pressures and perhaps provide a boost to the fortunes of retailers as tenants have extra money to spend.
It also raises the possibility that inflation will normalize faster than expected in 2023 given the importance of housing costs in the inflation data. There's a lag between changes in market rents and what gets reported in the Consumer Price Index report, but the softening we've seen over the past few months should show up in the inflation data no later than the middle of next year.
The fascinating dynamic in the economy at the moment is that while people have been focused on how much higher interest rates will slow down the economy, between falling gasoline prices, supply chain healing in the automobile sector and now the sharp deceleration in the rental market, consumers are getting relief on multiple fronts simultaneously. These may ultimately be one-off in nature, but should help keep the economy afloat well into 2023.
Bloomberg News provided this article. For more articles like this please visit
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