The past year has been a headache for would-be home buyers who dealt with quickly-rising prices and a shrinking number of options. That buyer squeeze now seems to be easing — and the housing headache is shifting to the rental market.
Rising vacancy rates during the pandemic led to stagnant or falling rents in many metro areas, but that’s showing signs of reversing, creating problems for both renters and the Federal Reserve in the months to come.
There are three factors likely to drive rents higher over the next year, at minimum. The first is the expected normalisation of the economy as people get back to their pre-pandemic routines, office buildings reopen and urban life returns. Data from Apartment List shows that rents have risen at a strong rate since March in the metros that were hardest hit by the pandemic. Apart from how you feel about rising rents, this dynamic should be welcome — normal life is better than people sheltering in place or working from home because business districts have shut down.
Second is how the recent frenzy of home-buying has changed
the rent-versus-own calculation. Home prices nationally are up by about 15% since early 2020 — significantly more in some metro areas like Austin, Texas — while inventories, despite rising somewhat in the past month, remain near historic lows. Some people who might have bought a home are deciding to keep renting instead to give the market time to normalise.
On a cost basis, renting has become relatively more attractive too, even with the decline in mortgage rates. If home prices have risen 15% or 20% in your area, an apartment with rent that’s 5% higher is a relatively better deal than it was 18 months ago.
The third factor is the speed of wage increases in certain lower-paid service industries as companies like Amazon.com Inc, Chipotle Mexican Grill Inc, and Costco Wholesale Corp engage in an arms race to staff warehouses, restaurants and big box stores.
While it won’t affect luxury apartments in New York or San Francisco, the higher wages will empower landlords to raise rents, particularly in metro areas that are housing-constrained.
Because renters often sign one-year leases, cumulative rent increases will phase in over the next year as contracts expire and reset. For instance, imagine that someone in San Francisco signed a lease last September for $2,400 a month in an apartment that went for $3,000 a month before the pandemic. By renewal time, the rent for that apartment, which has been steadily rising by about 3% a month over the course of the year, has fully recovered to $3,000. From the tenant’s perspective, that represents a 25% jump all at once.
This has implications for the Federal Reserve, too. In its June meeting, the Fed expressed a greater concern about inflation than it has in some time. While some of the conditions driving inflation this year will probably subside over coming months — used car prices being among the most obvious — depressed rents that were helping keep inflation in check will now be picking up.
—Bloomberg