Rents are starting to fall in the United States
- Some tenants are already signing cheaper leases across the country, and they could drop further in 2023.
- As demand slows and the number of available apartments increases, prices fall.
- Lower rents could help dampen inflation and make a severe recession less likely.
This story originally appeared on Business Insider.
If your rent has gone up this year, as it has for many Americans, 2023 might give you reason to cheer.
Tom Lawler, a former Fannie Mae economist, wrote in a recent Real Estate Bulletin that he expects rents across the country to not only slow, but see a rare “real dip” in real dollar amounts l ‘next year. And these declines are expected to spread and accelerate in 2023.
In fact, rents in the United States have already started to fall in some markets. Data shows that in the third quarter of 2022, national asking rents fell 0.4%, reflecting a change from just a year ago, when demand pushed prices to all-time highs.
Lawler’s forecast hinges on U.S. builders continuing to ramp up construction despite fewer tenants who want — and can afford — new rental units. It’s a rare story of oversupply in a housing market that has been weighed down by shortages for years.
Financial and economic fear among Americans is also driving the decline, says Anthemos Georgiades, CEO of Zumper, an online rental database.
“We have seen historic levels of migration throughout the pandemic as people have shifted to working from home and reinventing their living arrangements,” he said in a statement. “Now, with a turbulent and unpredictable economy raising fears of a recession, migration is slowing, occupancy rates are falling and rental prices are following suit.”
These predictions are already materializing in the rental market. According to RentCafe, although multi-family housing construction has reached a 50-year high, demand for apartments is evaporating. Data from the RealPage property database shows that in the third quarter of the year – a generally robust rental period – rental demand turned “moderately negative” as rental traffic fell. The October decline marked the first time in the company’s tracking history that demand turned negative during the third quarter.
Falling rent prices could not only be a lifeline for Americans’ bank accounts, but for the entire US economy as the Federal Reserve continues to raise interest rates in a bid to cool the costs. Lower rents could go a long way to convincing the Fed that inflation is under control and helping the United States avoid a major downturn that could include mass layoffs and plummeting home values.
“Right now it’s a race against the Fed,” former Federal Reserve economist Claudia Sahm told Insider. “The faster these things show up in consumer price inflation, the faster inflation comes down, the sooner the Fed will pull back.”
Economic downturn is already translating into cheaper rents for Americans
On a personal level, American renters will rejoice in lower rents after a record 17.6% increase in 2021 and additional hikes earlier this year.
In a harbinger of what could happen in the United States next year, many major cities are already experiencing declines. According to Zumper, more than half of the 100 U.S. cities measured in its monthly National Rent Report saw month-over-month price declines in October. Down 0.8% and 0.7% from September, the national median rent for a one-bedroom and two-bedroom unit now stands at $1,491 and $1,832, respectively.
Cities that have seen rapid rent growth in recent years, including San Jose, Tulsa and Seattle, all saw their rents drop from the previous month. Even New York, which has seen booming rents in recent months, has seen the median price of one- and two-bedroom apartments fall by more than 2%.
And domestically, the faster price growth slows, the quicker the Fed is likely to reduce the pace of its rate hikes that weigh on the economy. Given that housing accounts for about one-third of the consumer price index, the Bureau of Labor Statistics’ monthly inflation report, lower rents could go a long way in convincing that Fed inflation is under control.
While most economists expect a recession in 2023, the severity of the downturn may depend on how quickly prices fall.
Lawler’s analysis, along with recent rental market data, both suggest things are moving in the right direction.