Category: Blog

Can Higher Mortgage Rates Cause Rent Inflation?​​ 

(Section IV,​​ Semi-Elasticities)

• Introduction

In Sep-21 mortgage rates began increasing due to an increased demand to buy a home. Then in response to rising inflation, the Federal Reserve raised the federal funds rate by 25 bps on March 17, 2022. This took the benchmark rate from 25 bps to 50 bps. The federal funds rate currently is 5.50%. In June 2022, it began reducing its balance sheet gradually (known as quantitative tightening, or QT) by not reinvesting all the proceeds of maturing securities. Higher demand to own a home and this series of actions raised mortgage rates from 2.84% in Aug-21 to​​ roughly​​ 7.00% by the end of May-24.​​ A semi-elasticity is a numerical value​​ of​​ the​​ impact mortgage rates​​ have​​ had on the​​ year-over-year​​ (YOY)​​ rent appreciation for single family properties (Δ​​ RRA / Δ mortgage rate)​​ where RRA = %Δ rents. Table 1.a shows the estimated semi-elasticities at different​​ time​​ lags for 20 CBSAs.

In Table 1.a, out of 20 CBSAs, the highlight cells in red indicate which markets had a positive, and statistically significant, rent appreciation after​​ mortgage rates​​ changed at different lags,​​ in the time period from Jan-17 to Mar-24.​​ The cells in yellow indicate which CBSAs experienced a​​ negative relationship between appreciation​​ and mortgage rates​​ at each respective lag.​​ We see in Table 1.a, higher mortgage rates​​ 24 months​​ earlier would cause​​ ​​ rent appreciation​​ to accelerate​​ in 12 of the CBSAs. At a lag of 30 months, the rate of rent appreciation accelerated​​ following higher mortgage rates​​ in 15​​ of the CBSAs.​​ Only New York, NY had a negative response to mortgage rates.

• Semi-Elasticities:

Let​​ year-over-year​​ rent appreciation, RRA = %Δ rent ​​ = (Δ rent / rent). We are interested in how RRA speeds up or slows down due a change in the level of the mortgage rate, or Δ RRA for a given Δ in mortgage_rate. The speed (or magnitude) of how rent appreciation changes ​​ ΔRRA / Δ mortgage_rate is called the semi-elasticity.​​ At a lag of 12​​ months the​​ average​​ semi-elasticity for​​ Chicago, IL​​ is​​ about​​ 0.60​​ in Table 1.a.​​ 

We can piece-together​​ a calculation of a​​ semi-elasticity over​​ one​​ single year for Chicago, IL in Table 1.b​​ to gain an insight into the calculation. Over the 12 months ending 3/1/2023 the 30-year mortgage rate increased by 237 bps​​ (column 2). This 237 bps change in 3/1/2023 impacts renters rent in 3/1/2024.​​ At a lag of 12 months, the 237 bps higher mortgage rate is followed by rent appreciation jumping by 280 bps​​ (column 4).​​ For that one year,​​ the semi-elasticity​​ in Chicago, IL would be​​ 1.18.​​ 

In this example for Chicago, IL, the very large jump ​​ in mortgage rates (237) would have been followed 12 months later by the very large jump in rent appreciation (280 bps).​​ 

Having said that, (1) why should mortgage rates impact rents?​​ (2) why with a lag of any length? (3) are markets efficient across time periods?​​ 

Renters do not take out a mortgage. They should not care about what happens to ​​ mortgage rates.​​ However, as mentioned in​​ an​​ earlier blog,​​ Dias and Duarte (2019)​​ and Haidorfer (2024)​​ demonstrate that a contractionary monetary policy raises rent. They conjecture that monetary policy affects rent-versus-own housing tenure decisions. As the cost of homeownership rises, renters on the margin substitute away from purchasing, pushing up rents.​​ There would then be a positive relationship between mortgage rates and rent appreciation.​​ 

In regard to​​ the second issue,​​ most renters sign rent contracts that limit their ability to move in the current time period. If renters cannot do “anything” for a year,​​ at minimum,​​ without breaking the rent contract and paying a penalty,​​ this precludes changes in​​ mortgage rates​​ leading​​ to​​ changes in​​ RRA in the initial 12 months.​​ It could certainly be the case that landlords​​ are impacted by HPA and might break the rental contract and raise rents, but I do not know this apriori.

In regards to the third question, the evidence in Table 1.a indicates​​ three​​ things (1) in the first six months​​ following ​​ a mortgage ​​ rate​​ change, rent appreciation (RRA3bd) generally​​ moved inversely with mortgages (the results show that 12 CBSAs had a statistically significant negative relationship); ​​ (2) following​​ the 12th​​ month​​ after a mortgage rate change,​​ the statistical relationship between mortgage rates and the percent change in rents​​ -​​ the semi-elasticities​​ -​​ become statistically positive in a growing number of CBSAs; (3)​​ as rental markets adjust​​ following​​ changing mortgage rates 30 months earlier,​​ 15 CBSAs respond​​ positively​​ to higher mortgage rate.​​ 

• Why different semi-elasticities?

In addition to the co-factors specified in Equation 1 below, what​​ might​​ distinguish the CBSAs​​ in which rental appreciation rates moves versus those that did not? Chart 1 below shows the semi-elasticities of RRA3bd​​ for a lag of 24 months​​ for​​ those 12 CBSAs with statistically significant semi-elasticities from​​ the 30-year FRM​​ on the y-axis.​​ The​​ credit score is on the x-axis.

​​ 

It appears that following an increase in mortgage rates 24 months earlier, rent appreciation jumps in those CBSAs with lower average credit scores by more than those CBSAs with high scores. Renters in less affluent CBSAs have less market power and are not able to buy, switch neighborhoods, or switch CBSAs. ​​ 

• Methodology:

We measure the impact of mortgage rates twelve months earlier on rent appreciation​​ as:​​ 

RRA3bd = ​​ α ​​ + β1​​ L3RRA3bd + β2​​ L3HPA3bd​​ 

 ​​ ​​ ​​​​ + β3​​ L12RVP_3bd + β4​​ L12mortgage_rate​​ 

 ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​​​     ​​ ​​ ​​​​ + β5​​ employment + β6​​ llordc_shr​​ 

 ​​ ​​ ​​​​ + β7​​ L12vacc + β8​​ dum_cov + ε  ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​​​ (1)

Here:​​ 

• HPA3bd is home price appreciation..

• RVP_3bd is the monthly rental rate versus the price of buying.

• Mortgage_rate is the monthly average 30-year fixed rate mortgage, from Freddie Mac.​​ 

• Employment is the year-over-year change each month in payroll employment, from Bureau of Labor Statistics.

• Llordc_shr is the share of properties that are rental properties in a city, from Department of Census.

• Vacc is the rental property vacancy rate, from Department of Census.

• Dum_cov is value of 1 from 2020-03-01 to 2022-12-01 and 0 otherwise.

Table 1.a​​ shows the estimated β4​​ coefficient for each of 20 cities​​ (the estimated semi-elasticities)​​ using Equation​​ 1​​ at​​ different months of lag​​ on the mortgage rate.​​ 

Bibliography

Dias, Daniel A. and João B. Duarte (2019) “Monetary Policy, Housing Rents and Inflation Dynamics”. International Finance Discussion Papers 1248.

Haidorfer, Anton (2024) “The Dynamic Impact of Monetary Policy Over Short Horizons on Local Rental Markets”, Submitted to the AREUEA 2014 June conference.

In Sep-21 mortgage rates began increasing due to an increased demand to buy a home. Then in response to rising inflation, the Federal Reserve raised the federal funds rate by 25 bps on March 17, 2022. This took the benchmark rate from 25 bps to 50 bps. The federal funds rate currently is 5.50%. In June 2022, it began reducing its balance sheet gradually (known as quantitative tightening, or QT) by not reinvesting all the proceeds of maturing securities. Higher demand to own a home and this series of actions raised mortgage rates from 2.84% in Aug-21 to 6.78% by the end of Feb-24. What impact has higher mortgage rates had on year-over-year home price appreciation (HPA) and year-over-year rent appreciation for single family properties (RRA)?

In Chart 1, the x,y-observations for Feb-24 are rent appreciation on 3 bedroom single family properties in Washington, DC (RRA3bd SFR, 5.04%) and the 30-year fixed mortgage rate from Feb-23 (FRM, 6.26%). The FRM rate on Feb-24 was 6.78%, but this value would not show up on the chart because I am using the FRM from a year ago.​​ 

In this exercise, I am using median rents on only three bedroom properties from Altisource.com. The year-over-year rent appreciation (RRA) is thus labelled RRA3bd in the charts.

We do the same exercise for a 20-CBSA average in Chart 2. In Chart 2, the x,y-observations for Feb-24 are the average rent appreciation on 3 bedroom single family properties for 20 CBSAs in Feb-24 (RRA3bd, 5.06%) and the same 30-year fixed mortgage rate from Feb-23 (FRM, 6.26%).

In both charts, we see that the higher mortgage rates that followed the efforts that began in early 2022 to slow inflation have led to rental rates increasing at a faster pace 12 months later. The quickened pace of RRA3bd, however, feeds into OER which accounts for 29% of core CPI. This suggests that higher mortgage rates are actually causing a very large portion of core inflation to quicken.

The weekly 30-year fixed rate mortgage (FRM) on May 2, 2024, was​​ 7.22%. This is an increase of 438​​ bps since the end of Aug-21 when it was 2.84%.​​ On a monthly basis, the FRM ended Mar-24 at 6.82% which is just​​ 28​​ bps higher than this time last year (6.54%). Concurrently, the year-over-year home price gains through​​ Mar-24​​ for the 20 CBSAs tracked by this report (the CHTR 20-city index) have slowed down but remain positive at 4.94%. Table 1 shows the deceleration and now acceleration of the purchase market.

Do changes in home prices filter into the rental market. First it must be pointed out that month-over-month rent growth (Rent3bd column 5 and RentApts, column 7 have been seasonally adjusted). We see evidence of rent appreciation (RRA) for both​​ single family detached properties and​​ units​​ in multi-unit structures​​ staying​​ near or​​ above​​ 5.0%​​ (columns 6 and 8).

There is​​ some​​ evidence that growth in rents on SFR detached properties and apartments in multi-unit building are leading indicators of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties is​​ now 4.94%. We also see in column​​ 8​​ that YOY growth in rental rates on apartments in multi-unit structures is still positive and now growing at a very fast rate (5.61% vs 5.07% last month). This information suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.

To get a micro-sense of how rents are changing with prices, Chart 1 shows both the year-over-year increases in home prices (HPA) and in rental rates (RRA) as of​​ Mar-24​​ for our 20 CBSAs.

The chart shows that RRA loosely rises with HPA as we move to the right. The red bars show the significant rises in rental rates for 3-bedroom property and the equally fast rise for rents of apartments in multi-unit buildings.

In the face of higher mortgage rates, there are some reasons for the still amazingly steady home price growth we see in Table 1.

• Migration out of high-priced California

• Migration out of Central and South America to Miami

• The job market remains very strong​​ 

• Millennials moving into their childbearing age and trying to get out of their parent’s houses.

Because vacancy rates are low, the changes in rents for 3 bedroom detached properties and apartments that we see in Table 1 and Chart 1 are probably not due to seasonality. Rents are likely to stay high because:

• Vacancy rates are low, despite the increased purchases of homes.

• Landlords have pricing power.

• Apartment renters might have low earnings and weak credit and may have no other choices but to pay higher rents​​ 

Individual CBSA rental markets:

Although slowing, these still high rental prices may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of earnings to shelter. To partially answer this question, we show four additional charts below. The first (Chart 2) is for three-bedroom detached properties and the second (Chart 3) is data for apartment rental (all unit sizes) in multi-unit buildings.​​ 

Chart 2 shows that in major CBSAs, like Los Angeles, CA, New York, NY , Miami, FL and San Francisco, CA renters are willing to allocate more than 50 percent of their earnings to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from Aug-21 to​​ Mar-24​​ (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time before the Federal Reserve began increasing mortgage rates.​​ 

Renters are now paying more than 5 percent more of their earnings to pay their rent in at least four cities than they were on Aug-21. On the left-hand-side of the chart renters are paying less out of their earnings. In Phoenix, AZ builders have increased both the supply of houses for sale and supply of​​ apartments for rent and this has put downward pressure on rent of single family properties.​​ 

The increased economic hardships now facing renters show up even more so in Chart 5. In that chart, we see that renters of apartments in 5 of the 20 cities that we track are now paying​​ 5% more of their earning towards rent than they had been paying before the rates rose in Aug-21.

Over the 12 months ending Mar-24, the Consumer Price Index (CPI) increased 3.2%, energy prices increased 2.1% and commodity prices fell by 0.7%. Core CPI rose 3.80% from a year ago​​ (see Table 1) ​​and is still above the Federal Reserve’s 2% target.

The U.S. rental market is still running too hot.​​ The BLS is trying to measure monthly aggregate personal expenditures on housing. The BLS measures housing costs using its “cost of shelter”.​​ 

The CPI cost of shelter is essentially the sum of two components: The first, is a measure of the rents paid by apartment tenants in multi-unit structures for their primary residences. This measure is called CPI rent (also called tenants’ rent, or rent of primary residence). The second is an estimate of the rent that owner-occupied housing could command called Owners’ Equivalent Rent (OER). These measures tend to move together as the OER of a specific owner-occupied unit is estimated in part by observed actual rents on similar types of properties. Owner equivalent​​ rent, tenant’s rent and combined​​ shelter represent 29.9 percent, 9.6 percent and a total 42​​ percent​​ of core CPI, respectively.​​ In Table 1, shelter increases by 5.65% in​​ Mar-24.​​ 

The OER is a value calculated by the BLS from a survey and is reported with a significant time lag. Table 2 shows the correlation of OER with lagged mortgage rates during​​ a​​ 16 month​​ window of​​ Nov-22 through Feb-24. During that period of a very tight housing markets,​​ and​​ three years after mortgage rate changes, higher mortgage rates, counter-intuitively, drove rent inflation higher.​​ The positive correlation between mortgage​​ rates and​​ the YOY​​ change in​​ OER in the third year after mortgage rates have increased in Chart 3 is above 90%.

Since renters do not take out a mortgage,​​ why is there such a strong relationship between mortgage rates and both OER and Tenants Rent?​​ I will​​ first, immediately below,​​ attempt to explain the delayed but very strong relationship between mortgage rates​​ and​​ the two BLS data series​​ using​​ market data​​ from two data venders.​​ At the bottom​​ of this report,​​ I discuss​​ how/why mortgages rates impact rental markets.

Table 3 shows the correlation of rent appreciation​​ on​​ three bedroom​​ single family residential (SFR)​​ properties with mortgage rates​​ at​​ nine​​ different lags.​​ The data on YOY change in rents of SFR 3 bedroom properties in Table 3 comes from Altisource.com. I am using an average rent appreciation on 20 different CBSAs vis-à-vis​​ lagged mortgage rates.​​ 

In the window of time from Nov-22 to Feb-24, the positive correlation between mortgage rates and rent appreciation for three bedroom properties for the 20-CBSAs lagged 18 months in our sample was 70%.​​ Thus, higher mortgage rates in the 18 months before Nov-22 resulted in higher rent appreciation.

Taking the connection between market data and the national OER data reported by the BLS one step further, in​​ Table 4​​ I​​ shows the correlation of​​ national changes in​​ OER with rents​​ appreciation​​ on three bedroom SFR properties at different lags.​​ 

The highest correlation between OER and​​ the​​ 20-CBSA average of rent appreciation for 3 bedroom properties is 0.90​​ (at lag 18 months). The survey process used by the BLS results in OER being reported with a lag vis-à-vis Altisource.com which collects the​​ median​​ rents in each city each month. This is true because the BLS takes a massive, nationwide, rolling sample of housing units, splits them into panels, and then surveys each panel once every six months. The data then must be cleaned, checked, and matched to the same property twelve months earlier. They then take an average rent and a one month year-over-year change of that average. The surveying process essentially delays reporting changes in market conditions.​​ 

If we take the 18 months for mortgage rate changes to be fully realized by rental markets data for three bedroom properties from Altisource.com (RRA3bd) from Table 3 and then add to​​ it​​ the 18 months from Table 4 for the OER reported by the BLS to​​ realizes this market information we can understand the 36 month lag​​ between mortgage rates and OER​​ in Table 2.​​ 

The delay caused by the BLS methodology suggests using an 18 month lag on actual reported rent appreciation by Altisource.com to project OER. We do this in Chart 1P. The dotted line in Chart 1P (a projection) shows data for OER and a projection of possible future values of OER if it continues to track Altisource’s 3 bedroom rent values. ​​ The YOY OER rent reported by BLS for Feb-24 was 5.97% (shelter came in a 5.74% in Table 1). The actual YOY 20-CBSA average rent appreciation reported by Altisource.com for Feb-24 was 5.06%.​​ 

If we project this 5.06% and the other historical RRAs forward 18 months, we get Chart 1P. The dotted line is the year-over-year percentage change in rents on three-bedroom properties (RRA3bd) for the 20 CBSAs tracked by the CHTR lagged 18 months. The far-right observation of the dotted line is the 5.06%. Using historical rent appreciation rates of three bedroom properties from Feb-24 (5.06%) as a measure of OER and also shelter (from Table 1) for Aug-25, we can see the problem facing the Federal Reserve – rent appreciation does not slow down to the 2.0 percent target of the Federal Reserve.​​ 

We perform a similar exercise for Tenants Rents using​​ YOY​​ Zillow rent​​ appreciation​​ for​​ apartments​​ of all bedroom sizes​​ in multi-unit structures​​ and Altisource.com data for 1 bedroom apartments. Table​​ 5​​ shows the correlation between YOY change in Tenants Rent as reported by the BLS and YOY change in the 12-CBSA average rent appreciation for​​ both data series.

Both data series​​ with a 12-month lag​​ are good leading indicators of YOY changes in Tenant’s rent.​​ Using this information,​​ Chart​​ 2P shows a forecasted relationship between rent appreciation for apartments in multi-unit structures tracked by Zillow.com and the BLS’s tenants’ rent in CPI. ​​ The lag​​ between the two is much shorter than for OER (here about 12 months using the correlations from Table​​ 5, versus 18 from Table 3),​​ and​​ the variation is​​ less​​ than between OER and RRA3bd.​​ 

Rent appreciation has slowed considerably in the last year as new multifamily apartment buildings have come online in several southern cities. Yet the data shows YOY RRAapt has rebounded in the last few months. The point of Chart​​ 1.P​​ (and Chart 2.P) is that CPI Shelter is going to remain high in the second half of 2024.

Why higher interest rates might cause rent appreciation to accelerate 36 months later?

In a recent paper, Dias and Duarte (2019) find​​ that, in contrast to house prices,​​ housing rents increase after a contractionary monetary policy shock.​​ This finding was corroborated by Haidorfer (2024).​​ Dias and Duarte​​ conjecture that​​ it is reasonable to expect that all nominal prices of goods and services (rents included) should decline (or at least not increase) after a contractionary monetary policy shock. However,​​ this is not what they find. They​​ posit that​​ monetary policy affects the housing tenure decisions — own versus rent. They argue “If both the supply of housing for rental and of housing for ownership are inelastic in the short run, and there is limited convertibility between homes for sale and homes for rent, when interest rates go up, mortgage rates rise, and the cost of homeownership increases. As homeownership costs rise, the demand for rental housing also increases, and, as a result, housing rents rise.” ​​ Table 2 (page​​ 2) shows​​ this pattern --​​ following higher mortgage rates​​ 18​​ months​​ earlier,​​ rent appreciation quickens.​​ At that subsequent point, there is higher demand for rental properties.​​ Residential construction can increase​​ the​​ supply​​ of apartments in the near short-run, but this is not true for single family residential properties. In most major cities in the U.S.,​​ the available supply of buildable land has nearly peaked.​​ The supply of SFR properties is very inelastic.

This larger variation in apartment rents​​ that​​ occurred during the pandemic, (Chart 1.p versus 2.p) occurred​​ for two reasons: (1) The renter population experienced high turnover. Landlords were able to raise the rents on new tenants moving into an apartments. (2) Many apartment renters do not have signed leases. Landlords were able to charge more for the same apartment and renters had few choices.​​ 

Bibliography

Dias, Daniel A. and João B. Duarte (2019)​​ “Monetary Policy, Housing Rents and Inflation Dynamics”. International Finance Discussion Papers 1248.

Haidorfer, Anton (2024)​​ “The Dynamic Impact of Monetary Policy Over Short Horizons​​ on​​ Local Rental Markets”, Submitted to the AREUEA 2014 June conference.​​ 

The weekly 30-year fixed rate mortgage (FRM) on March 21, 2024, was 6.87%. This is an increase of 403 bps since the end of Aug-21 when it was 2.84% but just 61 bps higher than this time last year (6.26%). Concurrently, the year-over-year home price gains through Feb-24 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have slowed down but remain positive at 4.27%. Table 1 shows the deceleration and now acceleration of the purchase market.

Do changes in home prices filter into the rental market. First it must be pointed out that month-over-month rent growth (Rent3bd column 5 and RentApts, column 7 have been seasonally adjusted). We see evidence of rent appreciation (RRA) for both types of units staying above 4.0%.

There is evidence that growth in rents on SFR detached properties and apartments in multi-unit building are leading indicators of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties is now 4.97%. We also see in column 9 that YOY growth in rental rates on apartments in multi-unit structures is still positive and now growing at a very​​ fast rate (5.04% vs 5.16% last month). This information suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.

To get a micro-sense of how rents are changing with prices, Chart 1 shows both the year-over-year increases in home prices (HPA) and in rental rates (RRA) as of Feb-24 for our 20 CBSAs.

The chart shows that RRA loosely rises with HPA as we move to the right. The red bars show the significant rises in rental rates for 3-bedroom property and the equally fast rise for rents of apartments in multi-unit buildings.

In the face of higher mortgage rates, there are some reasons for the still amazingly steady home price growth we see in Table 1.

• Migration out of high-priced California

• Migration out of Central and South America to Miami

• The job market remains very strong​​ 

• Millennials moving into their childbearing age and trying to get out of their parent’s houses.

Because vacancy rates are low, the changes in rents for 3 bedroom detached properties and apartments that we see in Table 1 and Chart 1 are probably not due to seasonality. Rents are likely to stay high because:

• Vacancy rates are low, despite the increased purchases of homes.

• Landlords have pricing power.

• Apartment renters might have low earningss and weak credit and may have no other choices but to pay higher rents​​ 

Individual CBSA rental markets:

Although slowing, these still high rental prices may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of earnings to shelter. To partially answer this question, we show four additional charts below. The first (Chart 2) is for three-bedroom detached properties and the second (Chart 3) is data for apartment rental (all unit sizes) in multi-unit buildings.​​ 

Chart 2 shows that in major CBSAs, like Los Angeles, CA, New York, NY , Miami, FL and San Francisco, CA renters are willing to allocate more than 50 percent of their earnings to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from Aug-21 to Feb-24 (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time before the Federal Reserve began increasing mortgage rates.​​ 

Renters are now paying more than 5 percent more of their earnings to pay their rent in at least four cities than they were on Aug-21. On the left-hand-side of the chart renters are paying less out of their earnings. In Phoenix, AZ builders have increased both the supply of houses for sale and supply of​​ apartments for rent and this has put downward pressure on rent of single family properties.​​ 

The increased economic hardships now facing renters show up even more so in Chart 5. In that chart, we see that renters of apartments in​​ 5​​ of the 20 cities that we track are now paying 7% more of their earning towards rent than they had been paying before the rates rose in Aug-21.

The weekly 30-year fixed rate mortgage (FRM) on​​ Feb​​ 1,​​ 2024, was 6.63%. This is an increase of 356​​ bps since the end of Nov-21 when it was 3.07%​​ but just 36 bps higher than this time last year (6.27%). Concurrently, the year-over-year home price gains through​​ Dec-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have slowed down​​ but remain positive at​​ 2.94%.​​ Table 1 shows the deceleration of housing.

Do declines in home prices​​ filter into the rental market. First it must be pointed out that month-over-month rent growth (Rent3bd column 5 and​​ RentApts, column​​ 7 have been seasonally adjusted).​​ We see evidence of rent appreciation (RRA) mimicking (HPA) during the summer months.​​ There is​​ also​​ evidence that growth in rents on SFR detached properties appears to be a leading indicator of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties is 4.72% which​​ suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.​​ 

We also see in column 9 that YOY growth in rental rates on apartments in multi-unit structures is still positive​​ and​​ now growing at a​​ faster​​ rate (4.10% vs​​ 3.51%​​ last month). To get a micro-sense of how rents are changing with prices, Chart 1 shows both the month-over-month increases in home prices (HPA) and in rental rates (RRA) as of Jan-23 for our 20 CBSAs.

The chart shows that RRA loosely​​ rises​​ with HPA as we move to the​​ right. The red bars show the significant​​ rises​​ in rental rates for 3-bedroom property and the much slower​​ rises​​ for rents​​ of​​ apartments in multi-unit buildings.

In the face of higher mortgage rates, there are some reasons for the still amazingly steady​​ home price growth we see in Table 1.

• Migration out of high-priced California

• Migration out of Central and South America to Miami

• The job market remains very strong​​ 

• Millennials moving into their childbearing age and trying to get out of their parent’s houses.

Because vacancy rates are low, the​​ changes​​ in rents for 3 bedroom detached properties and apartments that we see in Table 1 and Chart 1 are probably​​ not​​ due to seasonality. Rents are likely to stay high because:

• Vacancy rates are low, despite the increased purchases of homes.

• Landlords have pricing power.

• Apartment renters might have low incomes and weak credit and may have no other choices but to pay higher rents​​ 

Individual CBSA rental markets:

Although​​ slowing, these still high rental prices may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of income to shelter. To partially answer this question, we show four additional charts below. The first (Chart 2) is for three-bedroom detached properties and the second (Chart 3) is data for apartment rental (all unit sizes) in multi-unit buildings.​​ 

Chart 2 shows that in major CBSAs, like Los Angeles, CA, New York, NY , Miami, FL and San Francisco, CA renters are willing to allocate more than 60 percent of their income to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from​​ Aug-21​​ to​​ Dec-23 (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time before the​​ Federal Reserve began increasing mortgage rates.​​ 

Renters are now paying more than​​ 4​​ percent more of their income to pay their rent in at least four cities than they were​​ on​​ Aug-21. On the left-hand-side of the chart renters are paying less out of their income.​​ 

The increased economic hardships now facing renters show up even more so in Chart 5. In that chart, we see that renters of apartments in​​ 6​​ of the 20 cities that we track are now paying significantly higher rents relative to their income than they had been paying before the rates​​ rose in Aug-21.

The 30-year fixed rate mortgage (FRM) ended on January 4, 2024, at 6.62%.​​ This is an increase of 387 bps since the end of Aug-21 when it was 2.84%,​​ but only 64 bps higher than a year ago. Concurrently, the year-over-year home price gain through Nov-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) was a positive 3.74% - slow but still positive (Column 4 in Table 1).​​ 

How long does it take for home price declines to filter into the rental market? This is an important question because rents filter into the CPI calculations and there is evidence that growth in rents on SFR detached properties appears to be a leading indicator of CPI-Shelter. The year-over-year growth in rents for 3-bedroom detached properties in Nov-23 was reported at 5.22% by Altisource.com and for detached properties of all bedroom sizes at 5.25% by Zillow.com. Given the long lag time for the rate changes to filter into the CPI data, this suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.​​ 

To get a micro-sense of how rents are changing with prices, Chart 1 shows the year-over-year increases in both home prices (HPA) and in rental rates (RRA) as of Nov-23 for our 20 CBSAs.

The chart shows that across CBSAs, RRA does seem to move in-step with HPA. The clear bars with a horizontal line (RRAz) are small positive values. As we move from left to right, the dotted bars show initially negative changes and then they turn into positive increase in HPA across CBSAs. The red bars show the significant​​ year-over-year​​ increases​​ in rental rates for​​ a​​ 3-bedroom property. Higher mortgage rates have deflated the home price bubble, but not the rent bubble. It is important to note:

• It can take 12 months for HPA to filter into RRA3bd and RRAz, depending on the city.

• Vacancy rates are low, despite the increased purchases of homes. Landlords have pricing power.

• Apartment renters might have low incomes and weak credit and may have no other choices but to pay higher rents.​​ 

Individual CBSA rental markets and earnings:

The still high appreciation of rental rate may continue. It depends, in part, whether renters can afford these increases and on the ability of landlords to increase rents in order to offset rising purchases prices for homes. The rule of thumb is that a household should allocate about 30 percent of its income to shelter.​​ 

​​ 

Chart 2 is based upon data for detached properties (but only with three bedrooms) from Altisource.com. Chart 3 is based upon data on detached properties (all bedroom counts) from Zillow.com. ​​ Both charts show that in major CBSAs, like Los Angeles, CA, New York, NY, Miami, FL and San Francisco, CA renters are willing to allocate more than 55 percent of their earnings to renting a three-bedroom property.​​ 

This suggests that renters in other cities may continue to pay up to live where they are living or choose to rent a smaller property or move to locations where rents are cheaper.​​ 

But the rental markets are changing differently in each city. Chart 4 shows the changes in RVY for renting a 3-bedroom property from Aug-21 to Nov-23 (the same values as in Chart 2 are in the numerator). We see that in the cities on the right, renters are considerably worse off than in the time since the Federal Reserve began raising rates. ​​ 

Matching Market Rental Data to​​ 

Apr-23 CPI Shelter Data

The BLS reported that CPI shelter increased year-over-year by 8.1% (Col 2 Table 1). The CPI rent indices (OER and Shelter) are lagging indicators of the market by about 12 months. Columns 3 and 4 show year-over-year rent appreciation for three-bedroom single family properties and apartments (all bedroom sizes) in multi-unit buildings.​​ 

Recognizing the long lag structure of Shelter based upon market data, CPI Shelter will slow but remain a major contributor to core CPI. This might require additional interest rate hikes by the Federal Reserve.​​