Jan-23: The U.S. Rental Market

04 Feb 2023


Actions by the Federal Reserve to slow the economy have led to​​ the​​ weekly 30-year fixed rate mortgage (FRM)​​ ending​​ Feb​​ 2,​​ 2022,​​ at​​ 6.09%. This is an increase of 302 bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price gains through​​ Dec-22 for the 20 CBSAs tracked by this report (the CHTR 20-city index)​​ have​​ slowed down and the​​ year-over-year HPA in​​ Dec-22 was​​ 8.39%. Moreover, existing home sales have fallen for​​ eleven​​ straight months in a row, and Zillow.com reported that home values in​​ Dec-22 tumbled (MOM), in several​​ formerly hot markets, most noticeably, Seattle, WA (-1.4%),​​ Las Vegas (-0.9%), Phoenix (-0.8%), San Francisco (-0.8%), and​​ Dallas, TX​​ (-0.5%). Table 1 shows the deceleration of housing.


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How long does it take for home price declines to filter into the rental market. 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 (5.81% vs​​ 6.61% YOY last month). Alternatively, growth in rents on SFR detached properties are running in the prior month about equal to overall inflation. The Center for Housing and Tax Research estimates that the lag between HPA and RRA is about 12 months​​ and that it is a negative relationship (see​​ 1/27/2022​​ BLOG), but the data in Table 1 suggests a​​ positive​​ contemporaneous​​ link between HPA and RRA. 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​​ Dec-22 for our 20 CBSAs.


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The chart shows that RRA​​ loosely​​ accelerates with HPA as we move to the right to the warmer states of Florida, Texas, Arizona and Nevada in which HPA YOY grew at exceedingly high rates. The striped bars show the still very strong rent increases for apartments in multi-unit buildings.


In the face of higher mortgage rates, there are some reasons for the amazingly strong home price growth we see in Table 1, but which now are beginning to reverse themselves:

  • Mortgage rates dipped back down and are still historically low

  • People rushing to buying homes before rates go up even more

  • Migration out of high-priced, drought-stricken California

  • Migration out of Central and South America to Miami

  • The job market remains strong​​ 

  • 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​​ 60​​ percent of their income to renting a three-bedroom property.​​ 


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Description automatically generatedThis 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 Jun-22 to​​ Dec-22 (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 Covid-19 health exogenous shock.​​ 

Renters are now paying more than 10​​ percent more of their income to pay their rent in at least four cities​​ than they were in Jun-20. On the left-hand-side of the chart renters are paying less out of their income.​​