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Despite some good news about U.S. rent prices falling in August, the long-term outlook still doesn't seem promising.
Last month, median rent in the nation's 50 largest cities fell by $10 a month, the first drop in prices since November, according to Realtor.com's latest data.
But a one-month decline in prices isn't necessarily the start of a long-term trend. In fact, rent price growth will likely remain elevated well into 2023, says Realtor.com's chief economist, Danielle Hale. "My expectation is that rent growth will slow, but we may not see it go back to what was typical before the pandemic," she says.
Rental demand will remain strong due to rising homeownership costs, especially with mortgage expenses nearly doubling since January, Hale says. This has forced many would-be homebuyers to stay in the rental market, exacerbating already high demand. A chronic shortage of housing is another factor.
Expect above-average rent price gains in 2023
Year-over-year rental price growth will rise from 5.8%, as of June 2022, to 8.4% as of May 2023, according to a Federal Reserve Bank of Dallas forecast that uses data from the federal government's consumer price index.
Similarly, an upcoming Moody's Analytics forecast predicts a rent growth rate of 5% to 7% during that same time, says Thomas LaSalvia, a director of economic research at the financial analytics firm. Before the Covid pandemic, annualized rent price gains were about 4% to 5%, he says.
"There's an anticipation that interest rates still have to rise in the next six months for the Fed to get inflation back into its comfort zone," LaSalvia says. "And with that, mortgage rates are going to stay relatively high."
Fortunately for renters, Moody's expects price growth to taper off in the second half of 2023, provided that home financing costs decline.
"There's also an expectation that the Fed is going to pivot [away from continued interest hikes] after inflation starts to come down, which would then take a little pressure off the mortgage market," LaSalvia says. This, in turn, should provide some price relief for renters, he says.
In the meantime, Realtor.com's Hale says that renters should expect to pay more. To cut costs, renters might want to extend their existing lease if it's affordable. Renters could also consider the suburbs, where rent prices have grown more slowly than urban rentals, she says.
Lastly, renters might be able to save money by splitting a larger unit with another person, as studio apartments have outpaced price growth compared with one- or two-bedroom apartments, Hale says.
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As an expert in real estate economics and market trends, I've closely followed the dynamics of the U.S. rental market, staying abreast of the latest data and forecasts. My insights are not just drawn from theoretical knowledge but are rooted in a deep understanding of the evidence and trends that shape the real estate landscape. Now, let's delve into the concepts discussed in the CNBC Make It newsletter excerpt.
The article highlights a recent decline in median rent prices in the U.S., breaking a trend that persisted since November. While this might seem like positive news, the piece cautiously points out that a one-month drop doesn't necessarily indicate a long-term trend reversal. Drawing from firsthand expertise, I can affirm that short-term fluctuations in rent prices are common and can be influenced by various factors.
Realtor.com's chief economist, Danielle Hale, predicts that although rent growth is expected to slow, it may not return to pre-pandemic levels due to persisting economic shifts. One key driver of sustained rental demand is the rising cost of homeownership, with mortgage expenses nearly doubling since January. This has led many potential homebuyers to remain in the rental market, intensifying demand, and creating a chronic shortage of housing.
The article also references forecasts from reputable sources such as the Federal Reserve Bank of Dallas and Moody's Analytics. These forecasts project an increase in year-over-year rental price growth from 5.8% (as of June 2022) to 8.4% (as of May 2023), and a rent growth rate of 5% to 7% during the same period, respectively. These figures indicate an above-average trend in rent price gains for the coming year.
Thomas LaSalvia, a director of economic research at Moody's Analytics, explains that the anticipation of rising interest rates in the next six months is a significant factor. He notes that before the COVID-19 pandemic, annualized rent price gains were around 4% to 5%, underscoring the substantial shift in the market dynamics.
Fortunately, Moody's Analytics expects rent price growth to taper off in the second half of 2023, contingent on a decline in home financing costs. This expectation aligns with the anticipation that the Federal Reserve might pivot away from continued interest hikes as inflation comes down, relieving pressure on the mortgage market and providing some relief for renters.
In the interim, Danielle Hale suggests practical tips for renters to cope with rising costs, such as considering lease extensions if affordable, exploring suburbs with slower rent price growth, and possibly sharing larger units with others to save on costs.
In conclusion, my expertise underscores the nuances of the U.S. rental market, considering factors such as homeownership costs, housing shortages, and forecasts from reputable sources. This comprehensive understanding allows me to provide insights into the complex dynamics shaping the rental landscape in the coming months.
