Despite a slowdown in consumer price growth, experts are warning that rents are unlikely to return to pre-pandemic levels. In June, shelter prices were the primary driver of increased consumer prices, with the consumer price index rising a modest 0.2% from the previous month and 3% from the previous year. While rental-price inflation has seemingly peaked, rent prices still saw a 0.5% increase from the previous month, paralleling the May increase.
Thankfully, other categories experienced either monthly declines or minimal increases, providing consumers with some much-needed relief from last summer’s wave of high inflation. However, even though items like eggs and gas may be cheaper compared to a year ago, rent prices are expected to remain significantly higher than they were in 2019, before the spike. The latest data from the Labor Department reveals that rents were up by a staggering 8.3% in comparison to June 2020, a time when prices were at record-breaking levels in places like Manhattan.
While housing inflation is predicted to continue slowing down, Russ Koesterich, a portfolio manager for BlackRock’s Global Allocation Fund, emphasizes that prices are unlikely to revert back to pre-2019 levels. One of the main reasons for this is the imbalance between housing supply and household formation. With not enough supply to meet the growing demand, housing costs, including rents, are expected to remain elevated.
In summary, while the rise in consumer prices may be decelerating overall, rent prices continue to stand out as an exception. Prospective renters should be prepared for a new normal where renting comes with a higher price tag.
Rental Market Outlook: Supply and Demand Dynamics
According to industry experts, the lack of supply in the housing market has not kept up with the increasing number of households being formed. This trend is expected to sustain housing costs, including rents, at higher levels than pre-pandemic times. Despite this, robust nominal wage growth and strong consumer balance sheets are believed to contribute to resilient demand, even in the face of rising costs.
In line with this, Zillow’s May rent report reveals that the typical asking rent price currently stands at $2,048 per month. While this only represents a $13 increase from the previous month, it signifies a substantial 4.8% increase from a year ago and an impressive 27% increase from the pre-pandemic average U.S. rent of $1,607 in March 2020.
Forecasting the rental market’s trajectory, Jeff Tucker, a senior economist at Zillow, suggests that rent prices are highly unlikely to return to pre-pandemic levels. Even though pressures in the rental market are easing, there is no indication of rents falling any further, apart from the typical slowdown observed during the winter season. Generally, rent prices tend to be resistant to downward movement, as landlords prefer offering concessions such as a free month’s rent or complimentary parking to attract tenants rather than reducing the listed price.
To achieve better rental affordability, considering the nationwide strain on affordability, a more realistic approach would be a slower and sustainable growth rate for rent. This would allow incomes to catch up and strike a balance in the rental market. Tucker affirms that this is more or less what has been observed so far this year. Furthermore, there is hope on the horizon as a historically high number of multifamily units are currently under construction. Consequently, the growing rental vacancy rate will grant more negotiating power to renters. As these new apartments enter the market over the next year or two, they are expected to exert downward pressure on rent growth for existing units.