Will Slowing Rent Appreciation Filter Into CPI in 2023?

(continuing from the front page …) On the other hand, landlords have more pricing power. However, new landlords (aka. property investors) in 2023​​ are confronted by the fact that property prices around them have significantly increased and at current rents (rents that existed before their purchase of the property) that their existing rates of return have fallen. Thus, there is an incentive for landlords to raise rents in the period after home prices​​ have risen and maybe lower rents if home prices fall.​​ This introduces five questions: 1) does rent appreciation​​ (depreciation)​​ mimic home price appreciation​​ (depreciation)​​ in the months following home price​​ changes, if so, 2) what is the maximum magnitude; 3) what is the lag; 4) is the relationship identical across cities; 5) does a fall in home price appreciation lead to rent appreciation slowing 12 months later​​ or is more going on​​ and this impact owner’s equivalent rent (OER) and the consumer price index (CPI)?​​ 



Section 2: Do rents​​ (and OER)​​ follow home prices?


A​​ renting​​ household can either rent a single family detached property or an apartment unit in a multi-unit building. Here, we discuss (1) median rents charged each month for three-bedroom single family residential properties and (2) median rents charges on apartments in multi-unit buildings. Rent data by construction consists of rents that were newly contracted that month combined with all the rents which were contracted the prior 11 months. ​​ Let rental rate appreciation be defined as RRA3bd​​ = %ΔR where R is the median rent in given city​​ for a three bedroom property and RRAapt = %ΔR where R is the median rent for an apartment in a multi-unit structure (of​​ any bedroom size) in a given city.​​ Also let home price appreciation be defined as HPA = %ΔP where P is the median price of a three-bedroom home.​​ My rent data (R) is a rolling average of prior months whereas the sales price data (P) reflects sales that transpired that prior month.​​ 


Chart 1 shows the month-over-month increase in rents in 20 cities (RRA3bd,​​ or core based statistical areas, CBSAs)​​ for renting three bedroom properties as of Nov-22. The chart points out that median rents have fallen​​ month-over-month​​ in several CBSAs.​​ 


Chart 2 shows the month-over-month increase in rents in 20 cities (RRAapt,​​ or core based statistical areas, CBSAs) for renting an apartment in a multi-unit building (all bedroom sizes) as of Nov-22. This chart points out that median rents have fallen month-over-month in even more CBSAs.​​ 


Both Charts 1 and 2 seem to indicate that​​ RRA​​ is​​ following​​ MOM HPA which​​ has been​​ slowing (or​​ falling​​ in some CBSAs)​​ due to higher mortgage rates.​​ 



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One has to ask, “why would rent appreciation fall or go negative just because home price appreciation has fallen or gone negative?” It is widely perceived that there is a shortage of homes for renting (vacancy rates are low) and a shortage of homes for buying (inventory-to-sales ratios are very low).​​ 


The point is,​​ the cause of MOM RRA declining is not obvious. There have been discussions that household formation has slowed (individuals are moving in together again to share the costs of renting). This seems like an unlikely explanation​​ as to why​​ markets​​ have​​ adjusted​​ so quickly. It could also be a dead cat bouncing. That is landlords bumped up rents so quickly that renters​​ now​​ say,​​ “I am​​ leaving if you increase my rent”. There is also the notion that new rental supply is coming online. Indeed, in cities where there​​ is very little available land to build single family properties, building up with multi-unit structures makes sense. ​​ The construction of new rental buildings, however, takes time.



Section 3: Do rents​​ (and OER)​​ adjust to relative prices?


A renter essentially has three choices: (1) pay the going rental rate (2) buy a home or, (3) move back with mom and dad. We can compare the cost of the first two options. Here buying a house refers to the cost of owning for a month (principal repayment and mortgage interest) rather than the ​​ wider definition that also includes the costs of mandatory services and charges, regular maintenance and repairs, taxes, and utilities.​​