Rents will continue to rise, contributing to inflation, until the end of the year, economists say.
With home prices and mortgage rates this high, many prospective homeowners are choosing to rent longer, opting to wait it out until prices normalize. But rents are also increasing, helped along by a housing-supply shortage that’s hiking the cost of living for millions of Americans. The national median monthly asking rent even surpassed $2,000 for the first time in May, according to Redfin,
That’s all feeding into inflation, the very enemy the Federal Reserve is trying to address. Shelter, including rental costs and owners’ equivalent rent, or what a homeowner could rent their property for, makes up about a third of the Consumer Price Index, a key inflation gauge. Many analysts say the consumer price index for June is expected to top the 8.6% increase on the year in May when the report is released on Wednesday morning.
Over the first half of this year, rents have increased by 5.4% nationwide, according to a report by Apartment List. While that’s actually a slower rise than the jump in rents over the same period last year, big cities are still seeing some absurd swings in rental prices: rents in New York City, for example, are up 27% over the past year, Apartment List said. The San Jose metropolitan area, meanwhile, has seen the fastest rent growth over the last six months, while prices in Boston, Seattle — and even smaller markets like Hartford, Conn., and Providence, R.I., — are also increasing.
“Rents are surging given that housing supply is still tight; plus, prices are also going through the roof,” Jennifer Lee, senior economist at BMO Capital Markets, told MarketWatch.
“‘Given that housing, or owners’ equivalent rent, is over 20% of the CPI index, yes, that is concerning as it will add to already high inflation pressures.’”
— Jennifer Lee, senior economist at BMO Capital Markets
“Given that housing, or owners’ equivalent rent, is over 20% of the CPI index, yes, that is concerning as it will add to already high inflation pressures,” she added. “Another sign that peak inflation is not here yet.”
With home prices showing some signs of dropping in some overheated markets, there could be some relief to come for renters.
“We find that home prices lead rental prices by at least 12 months,” Kathy Bostjancic, chief U.S. economist at Oxford Economics, told MarketWatch.
“Eventually a cooling in the pace of home-price gains should lead to a cooling in rental prices — likely sometime mid-2023,” she added.
Even so, inflation may continue to burn low-income people and people of color — who have already had a disproportionately hard time staying current with their housing payments during the pandemic — in the months to come.
A household is considered cost burdened if they put more than 30% of their income toward rent — a reality for about 46% of renters in 2019, according to the Joint Center for Housing Studies of Harvard University. That year, lower-income renters accounted for 62% of cost-burdened households, and 86% of households that spent half or more of their income on rent.
For those families, even a slight increase in rent can spell disaster, since they might not have enough financial wiggle room to make it work.