Rent prices are declining and set to fall further in 2023. It could be the push the economy desperately needs to get back on track.
In May, the median US asking rent dropped 0.6% year over year to $1,995, marking the largest annual decline since March 2020, according to data from real estate-brokerage Redfin. Over the past nine months, asking rents have decelerated in metros across the country as rental demand fades and vacancy levels climb.
Rental growth in the US is now below pre-COVID norms, Jay Parsons, the SVP, chief economist and head of industry principals at RealPage, told Insider.
"We're starting to see all of these units under construction be completed," Parsons said. "All of that new product is giving renters a lot more options — it's also forcing property managers to compete with each other." The dynamic has led to a "predestined down ramp" for inflation, he said.
Housing costs, including those for both homeowners and renters, account for roughly one-third of the consumer price index, a measure of inflation. Throughout the pandemic, soaring rental prices — brought on by population growth and heightened demand — have helped to drive inflation to historic levels. However, as rents and home prices fall, inflation is coming back down to earth. It's helping to boost consumer confidence, which could ultimately lead to greater stability in the economy.
"Rents are the primary metric used to measure homeowner costs, arguably making them the most important variable in the largest category of CPI," Parsons said. "We're already seeing the benefits of slowing inflation in the rental market. It's just not showing up yet in the CPI."
In May, the CPI rose 4% year over year, for the smallest 12-month increase since March 2021, according to a report from the Bureau of Labor Statistics that was released on Tuesday. Despite a downturn in rents and home prices, housing costs were the largest contributor to inflation.
That's because BLS data lags current economic conditions as it measures contract rents — what renters currently pay — and not spot rents, the amount renters would pay if they just signed a new lease.
However, while the CPI has yet to show significant changes in rental inflation, other indices that focus more on new leases are already showing year-over-year inflation coming way down.
The Federal Reserve Bank of Cleveland's New Tenant Repeat Rent Index shows that during the first quarter 2023, rental inflation was 0%, down from around 12% during the same time period in 2022. This trend was echoed by other indices including CoreLogic and Zillow ZORI, which all display a rapid downtrend since last year.
Parsons said that price declines in rents are likely to soon appear in the CPI, which could help push inflation down even further.
"There's about a 12 month lag between asking rents versus the CPIs version of rent," he said. "I can say with pretty strong confidence it's going to continue to decelerate throughout the rest of the year and into next year."
Lower inflation helps people and businesses better plan how they save and spend while allowing the Federal Reserve to boost the economy amid a downturn. With lower inflation, renters can have increased confidence in a more stable rental economy while giving renters more options.
"I think over the next year and a half, we're gonna see very limited rent growth," Parsons said. "Renters will have more options, see more discounting, and are more likely to get a better deal than they would have during the last two years."
