Actions by the Federal Reserve to slow the economy have led to a rise in the weekly 30-year fixed rate mortgage (FRM) as of Oct 27, 2022, to 7.08%. This is an increase of 401 bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price changes through Aug-22 for the 20 CBSAs tracked by this report (the CHTR 20-city index) did show some signs of slowing down. This year-over-year HPA in Sep-22 was 12.10%. The Case-Shiller 20 city home price index, which is reported with a lag, increased for Aug-22 by 13.1%. However, existing home sales have fallen for eight straight months in a row, and Zillow.com reported that home values in Sep-22 tumbled (MOM), in many formerly hot markets, including Phoenix (-2.0%), San Francisco (-1.5%), Las Vegas (-1.3%) and Los Angeles (-1.0%).
How long does it take for home price declines to filter into the rental market – if ever? We see in column 9 that growth in rental rates on apartments in multi-unit structures is still positive, but growing at a slower rate (8.41% vs 9.84% YOY last month). Alternatively, growth in rents on SFR detached properties are running about equal to overall inflation. The Center for Housing and Tax Research estimates that the lag between HPA and RRA is about 12 months.
To get a micro-sense of how rents are changing, Chart 1 shows the year-over-year increases in rental rates as of Sep-22 for our 20 CBSAs. The chart shows that rents in the warm states of Florida, Texas, Arizona and Nevada grew at exceedingly high rates. The striped bars show the very strong rent increases for apartments in multi-unit buildings.
There are many reasons for the amazingly strong home price growth we see in Table 1, but which now are beginning to reverse themselves:
Rising, but still until four months ago, historically low mortgage rates
Fewer people rushing to buying homes before rates go up even more
A need for more space due to the pandemic and working from home
Migration out of high-priced, drought-stricken California
Migration out of Central and South America to Miami
Earlier stock market gains, and a strong job market
Millennials moving into their childbearing age and trying to get out of their parent’s houses.
The causes of the increases in rents for apartment dwellers we see in Table 1 and Chart 1 are less understandable. The reasons might be:
Apartment renters might have low incomes (but some renters in major CBSAs are high incomes) and have a lack of alternatives
Vacancy rates are low, despite the increased purchases of homes
Migration out of Central and South America to Miami.
Individual CBSA rental markets:
How many more months that these strong numbers last depend on whether renters can afford these increases? The rule of thumb is that a household should allocate about 30 percent of income to shelter. To answer this question, we show two additional charts below. The first (Chart 2) is for three- bedroom detached properties and the second (Chart 3) is the 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 40 percent of their income to renting a three-bedroom property.