Rent prices, which experienced a rapid surge during the pandemic, have now settled down due to increased options in the market and decreased demand. This trend is expected to persist for some time.
Cooling Rental Growth in June
Two prominent sources, ApartmentList and Zillow, have reported that asking rents continued to cool in June compared to the previous year. Zillow’s data shows that national rent growth was at its lowest level since April 2021, registering a 4.1% increase. Similarly, ApartmentList recorded flat rental rates—a significant milestone considering the months of rapid increases experienced in late 2021 and early 2022.
Weaker Demand Influences the Slowdown
Christopher Salviati, a senior economist at ApartmentList, attributes part of the slowdown in rent prices to weaker demand. According to Salviati, rents are now 24% more expensive than they were in January 2021. He points out that renters are realizing their money doesn’t stretch as far as it used to. Factors such as inflation, consumer confidence, and recession concerns contribute to this cautious behavior among households, resulting in decreased rental demand.
Rental Supply Boosts Market Slowdown
Construction Boom Leads to Increase in Rental Units
Recent data from the Census Bureau has revealed a significant increase in the construction of rental units, resulting in a slowdown in rental price growth. This surge in construction activity has been particularly evident since September 2022, with buildings containing five or more units being completed at an above-average rate. In fact, in February of this year, completions reached a remarkable seasonally-adjusted annual rate of 542,000 units, which is the highest level recorded since 1987. These newly completed units will soon become available on the market, contributing to the overall rental supply.
More Units Under Construction
Furthermore, the upcoming supply of rental units shows no signs of slowing down. May data indicates a record number of such units currently under construction, according to the seasonally-adjusted Census figures. This continued expansion of rental properties in development suggests that any growth in rental prices will likely be restrained. Zillow predicts that these units will become available within the next one to two years.
Rental Homes on the Rise
In addition to the surge in multi-unit rental developments, there has also been a notable increase in single-family homes being built specifically for rental purposes. Analysis of Census data spanning nearly five decades conducted by BTIG reveals that during the fourth quarter of 2022, a record high of 8.8% of all new construction starts for single-family homes were intended for rental use. This trend persisted into the beginning of this year, as evidenced by BTIG’s study.
Implications for the Housing Market
The growing prevalence of rental properties is raising questions about their impact on the wider housing market. Carl Reichardt, a BTIG analyst focused on home builders, highlights one such concern: the comparison between the cost of renting versus owning a home. The rise in single-family rental construction has fueled this debate and warrants further examination, according to Reichardt’s analysis.
As the rental supply continues to expand, it is clear that it will play a significant role in shaping the future of the housing market. With increased availability and a potential dampening effect on rental prices, prospective renters and homeowners alike will need to carefully consider their options.
The Impact of Competition on the Housing Market
According to industry expert, Reichardt, an excess of competition in the housing market could potentially make renting a single-family home more attractive than owning it. This, in turn, creates competition for builders in the real estate industry. As a result, shares of public builders have experienced significant growth this year, with increased demand for new homes.
Although new home sales saw a spike in May, the sentiment among buyers remains largely negative. Only 22% of respondents in Fannie Mae’s National Housing Survey view it as a good time to buy a home. Although this is slightly higher than the all-time low of 16% last year, it is still significantly below the historical average of 57%. However, there is more optimism among potential sellers, with 64% stating that it is a good time to sell a home.
One uncertain factor is whether landlords will decide to list their previously rented homes for sale if rents begin to slow or decline. The ownership of single-family rentals by large institutional investors and online short-term rental platforms is a fairly recent development. According to Reichardt, these new dynamics have impacted the housing market’s supply and the various ways of monetizing shelter capacity. While this impact is not yet significant, it is definitely something worth monitoring closely.
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