Rent Declines Are Definitely Decelerating

The Federal Reserve’s Federal Open Market Committee is expected to keep interest rates steady in its meeting this afternoon and not agree to cut them. The reason is the uneven economic information about how quickly inflation is slowing and even whether it still is at all.

A new report from the National Association of Realtors won’t help getting to yes. They note that the decline in growth rates of rents — when shelter has been one of the biggest drivers of inflation — is slowing. Exactly the wrong direction to convince the Fed to lower interest rates.

“May 2024 marks the 10th year-over-year rent decline in a row for 0-2 bedroom properties observed since trend data began in 2020. Asking rents dipped by $13, or -0.7%, year over year,” the NAR wrote. “The median asking rent in the 50 largest metros registered at $1,732, up by $10 from last month but still down $24 from its August 2022 peak. The median rent declined in all size categories with larger declines in smaller-sized units: Studio: $1,449, down $28 (-1.9%) year over year; 1-bed: $1,612, down $18 (- 1.1%) year over year; 2-bed: $1,925, down $14 (-0.7%) year over year.”

Rents are still falling but only against historically elevated baselines that resulted from an influx of investors because many other investment opportunities were paying poorly given low interest rates. The flood of capital was liquid demand, and the economic result was rising prices and falling cap rates. Business plans had to incorporate growing rents to make financial sense.

Yes, rents have been falling, but not by that much from one measure. According to NAR’s calculations, even after 10 months of decline, U.S. median rent is only 1.4%, or $24, below the August 2022 peak. It was still $306 (21.5%) higher than the same time in pre-pandemic 2019, and “this increase is roughly on par with what has occurred in overall consumer prices (up 22.7% in the five years ending April 2024) and pales in comparison with the 52.7% increase in the median price per square foot of for-sale home listings in the five years ending May 2024.”

By unit size, studio rents were down 1.9% over the last year but up 17.3% over five years. For one-bedrooms, it was a year-over-year 1.1% drop but a 20.3% five-year gain. Two-bedrooms saw a 0.7% year-over-year slide and a 23.3% gain over five years.

Rents are likely to continue slowing through the rest of the year, but the NAR says the deceleration “bottomed out” in February 2024 and have slowed since. “This deceleration trend could hinder further improvements in the overall rate of inflation and add long-term uncertainties, underscoring the consistent need for additional housing construction to alleviate the supply shortage that is contributing to higher costs,” they wrote.

But multifamily construction is slowing after record deliveries, and much of it was focused on upper-income people in growth areas because developers, who faced increasingly expensive building costs, needed higher rents to justify construction. Once the additional building slows, rents will likely start climbing again, and so will inflation.