Why slowing rent growth is a good sign for the economy, future buyers
Rent growth was up just 0.3% YoY in April and is falling below inflation and wage growth, which "suggests better times ahead for the U.S. economy."
- Construction of rental units has eased demand, resulting in minimal annual rent growth.
- The slowdown in rental price growth could further cool inflation in the coming months, which in turn may ease mortgage interest rates.
- If wage growth continues to outpace rent increases, renters will be in a better position to save for a down payment.
Rental prices for apartments and houses are falling behind the current inflation rate, which could mean good news for homebuyers later this year.
Several recent reports indicate that new apartment and multifamily home construction is putting a dent in demand and slowing down rent increases. Realtor.com's April Rent Report estimates median rent across the top 50 metros was up just 0.3% year-over-year, the lowest growth rate since the beginning of the pandemic more than three years ago.
Redfin's April report also found just a 0.3% rise year-over-year, making it the 11th straight month of slowing growth.
"The balance of power in the rental market is tipping back in tenants' favor as supply catches up with demand. That's easing affordability challenges and giving renters a little wiggle room to negotiate in some areas," said Redfin Deputy Chief Economist Taylor Marr. "The market has become more balanced, but the scales could tip back in favor of landlords if homebuilders pump the brakes on new construction in response to slowing rent growth."
Rent growth now lags behind inflation, wage growth
A report compiled by Beekin and analyzed by CJ Patrick Company found the rate of rental price increases for both single-family rental properties and multifamily units trailed the consumer price index and wage growth in the first quarter of 2023.
Out of the 74 single family rental markets studied, only one — Savannah, Georgia — had a year-over-year increase higher than the CPI. The CPI rose 5.8% in the first quarter compared to a year ago, while rent prices overall rose just 3.34% for multifamily rental units, and single-family rentals actually declined 2.72%.
In its Single-Family Rent Index, CoreLogic noted that the slowdown in rent increases is happening unevenly, however.
"The slowdown is more pronounced in the higher-priced tier, where growth is now about the same as it was before the pandemic," said Molly Boesel, principal economist at CoreLogic.
While rental growth at the lowest price tier remained above CPI at 6.7%, it has fallen by half since March 2022. Growth in the higher-priced tier was just 2.9%, according to CoreLogic.
Slowing growth should provide some relief for renters, who have faced significant rent increases over the past few years. It's also good news for the overall economy as the federal government continues to try and tame inflation.
"Since housing costs — rental rates in particular — are such a large component of the CPI, these trends suggest better times ahead for the U.S. economy," said Rick Sharga, founder & CEO of market intelligence firm CJ Patrick Company. "With listing prices for single-family rentals declining slightly and rates for multifamily rental units rising at a much slower pace than a year ago, the probability is that we'll see better inflation numbers in the months ahead."
Lower inflation would likely lead to lower mortgage rates, increasing affordability for buyers if home prices remain stable. Rent increases that remain below the pace of wage growth would also give renters a chance to save more for a down payment.
Sharga expects mortgage rates to dip below 6% before the end of the year. This could be a double-edged sword, however, as improving affordability would increase demand.
"If demand from homebuyers increases, we could actually see a bit of a spike in home prices later this year," Sharga said. "If that happens, combined with modest growth in rental rates, there's a chance that some people may just decide to continue renting for the long term, as it may be more affordable on a monthly basis."
Supply is finally catching up
One major factor contributing to lower rent prices is a significant increase in multifamily construction. According to the Realtor.com report, this has pushed the vacancy rate to 6.4% last quarter, the highest level in two years, and approaching the average of 7.2% between 2013-2019.
In the Beekin report, 49 of the 74 markets analyzed saw year-over-year declines in overall rental rates. The markets with the largest price declines included Colorado Springs, Colorado (down 9.8%); Clarksville, Tennessee (down 8.9%); and Lakeland, Florida (down 8.89%).
"It's probably worth noting that many of the markets experiencing year-over-year declines in both single-family and multifamily rental list prices are also markets that had the most explosive growth during the early stages of the COVID-19 pandemic," Sharga said.
"We've seen similar trends in the owner-occupied housing market, where metro areas like Phoenix and Boise are experiencing declines in both home sales and prices."