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.
