According to reports, rent prices across the country have risen by almost 30% since last year new report. As fears of a housing market crash continue to spread, rental prices appear to have been an unintended externality.
So why is the rent so high?
Well, with inflation still a top concern for many Americans, rising rents have turned out to be one of the more direct consequences of rising prices. With this in mind, there is no single cause for the increase in rental prices, but rather a whole set of effects that contribute to their rise in the last year.
According to new data from Dwellsy, the average asking rent in August was $2,110, up $1,650 from a year earlier. The $460 increase has a lot to do with the state of housing as a whole. Just as a reduced supply of homes for sale supported home prices for much of the year despite fluctuating demand, there remains a limited supply of rentals available.
Unlike homes for sale, however, demand for rentals is at one of the highest levels in US history. As mortgage interest rates continue to hit new highs, more Americans, especially families, are choosing to rent instead of paying an expensive mortgage premium to buy. As such, rents are more or less where housing was a year ago. Sky-high demand in the face of limited supply generally equals unbridled price growth.
This begs the question, when will the rent be reduced?
“Relief for tenants on the horizon,” according to Dwellsy CEO
Jonas Bordo, CEO and co-founder of Dwellsy, commented on the forces behind rising rental costs:
“If you want to go a little further into the details, single-family home rentals are driving the entire market. Across the country, this type of rental is in high demand as Americans look for larger residences. (We can thank the pandemic, at least in part, for that: People want more space for home offices…and from each other.) Rent has risen accordingly by more than 36 percent since August 2021. Believe it or not, there are some cities that where asking rent has grown by more than 100 percent as steep demand for single-family rental housing drives up total rental costs.”
The fact that single-family rentals bear the brunt of the increase is significant. Apartment rent increased by only 4.7% year-on-year. It is clear that higher mortgage rates have a greater impact on households looking to buy a home, as reflected in the rise in rents for a single home. With this in mind, we can expect that rents are likely to decrease along with mortgage rates.
According to Bordo, there is evidence that the slowdown has already begun.
“The good news is that there is little relief on the horizon for renters. Despite the large year-over-year increase, the average asking rent rose just 0.5 percent (or $10) in August. This is important because you would normally expect rent to increase by 1 percent as rents approach their peak season in early fall. I expect this slowdown to continue.”
However, there are other forces at play that may put downward pressure on rents.
Will rent prices fall next year?
Mortgage rates are surprisingly high right now. This week only Freddie Mac reported that the 30-year fixed-rate mortgage reached 6.29%, nearly triple the rate of 2.88% recorded a year ago and about the level reached during the housing crisis of 2008. Although can see how high mortgage rates are and assume that a decline is inevitable is increasingly complicated.
Mortgage rates technically work independently of things like interest rates and the federal funds rate. However, they often move in conjunction with each other. This is because mortgage rates tend to follow suit 10-year Treasury yields are heavily influenced by expected interest rates. The 10-year is currently trading at its highest level since 2011. And with two more potential rate hikes on the way before the remaining Federal Reserve Open Market Committee (FOMC) meetings, lending rates may have additional room to grow.
As households continue to prefer renting over buying, rental prices are unlikely to decline. As long as mortgages remain high, households are unlikely to return to home buying. And as long as interest rates continue to rise (with Treasury yields rising), mortgage rates are unlikely to fall significantly. It’s ugly, complicated and increasingly uncertain. However, it remains the most logical sequence of events necessary for rental prices to return to normal.
If the economy slows more dramatically in the coming months, the Fed may back away from its hawkish program. If the Fed-induced recession turns out to be a bit bigger than the central bank is aiming for, they may even decide to cut interest rates at some point next year or in 2024. This would lower rents due to the sequence of events mentioned above . But at the end of the day, it’s speculative. Rents probably depend on time and time itself.
As of the date of publication, Shrey Dua did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the writer and are the subject of InvestorPlace.com Publishing Guidelines.
With degrees in economics and journalism, Shrey Dua uses her extensive media and reporting experience to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have been featured in Morning Brew, Real Clear Markets, Downline Podcast and others.