Big Switch for Renters as Wages Ramp Up More than Rent Growth

Wages are finally outperforming rents and by a wide margin. The trend is expected to continue in the immediate future, according to Jay Parsons, Chief Economist of RealPage, who also authored this recent report. 

Year-over-year wage growth in the country topped effective apartment rent growth for nine consecutive months; specifically, through August of this year they topped rents 5.3% to 0.3%. The income data comes from the Federal Reserve Bank of Atlanta’s Wage Growth Tracker while the rent data covers effective asking rents for market-rate apartments, which RealPage tracks. Real average hourly earnings are up 1.2% in the last 12 months ended in June, according to the Labor Department.

Why the change? The rent growth is decreasing due to a big uptick in new apartment construction, which Parsons said, has hit an “historic surge.” Part of that was due to low occupancy during 2021 when the pandemic was at its peak, high-rent growth and low interest rates, all leading to a significant apartment construction wave. In fact, it surpassed a 50-year high. During the nineteen months in 2021-22, rents grew cumulatively almost twice as fast as wages.

But now the gap is disappearing, and Parson said it may be erased by year-end 2024 and may remain negative in some markets.

If rents flatten or fall, inflation continues to cool and employment remains healthy, the country could be entering a stretch where renters increase their spending power, Parson said. That would particularly help upper-income renters to have greater choice than they’ve had in many years due to more units, and more rent concessions.

In the meantime, Parsons noted that this won’t solve the country’s huge affordability changes. “We’re still short millions of low-income affordable housing units.” But, he added, “it’s still a significant plot shift that benefits renters—and likely rental housing operators, too, via strengthening demand at a time when supply is outpacing demand.”