Will Slowing Rent Appreciation Filter Into CPI in Late 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​​ Zthe 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​​ all​​ prior months​​ contract rate​​ whereas the sales price data (P) reflects sales that transpired that prior month​​ (a spot rate).​​ 


Table 1 indicates that rents are highly correlated with home prices. This initially looks strange because the HPA reflects the spot rate at time of purchase. Renters generally sign a contract with landlords. One would expect that rent changes might initially have little to do with home price changes.​​ This is the idea of sticky rents. Table 1, however, suggests that rents are not sticky.​​ 



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Data from the U.S. Census Bureau’s Property Owners and Managers Survey in 1995 (single-family and multifamily units,​​ “excluding data not reported or for rent-free units) showed that 44.4 percent of all units had annual leases, 4.0 percent had leases longer than one year, 36.1 percent had leases less than one year, and 15.5 percent had no leases.”​​ Even if ½ of all tenants​​ had an annual lease it is surprising that 3 months after home price rise,​​ rents rise​​ also.


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We can think of across time or across CBSAs.​​ 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​​ May-23. The chart points out that median rents have​​ risen​​ month-over-month in​​ every​​ 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​​ May-23. This chart points out that median rents have​​ risen​​ month-over-month in​​ every​​ CBSAs.​​ 


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Both Charts 1 and 2 seem to indicate that RRA is following MOM HPA which has​​ rebounded​​ despite​​ very high​​ mortgage rates.​​ But other forces impact rent appreciation.


One​​ must​​ 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​​ rising again​​ is not obvious.​​ Why might rent appreciation increase or decrease?​​ 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”​​ but now landlords are increasing the rents again. 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?


Table 1 above shows that RRA does follow HPA​​ prices near concurrently, but other forces are impacting RRA3bd and RRAapt.