Actions by the Federal Reserve to slow the economy have led to the weekly 30-year fixed rate mortgage (FRM) on Mar 2, 2022, to end at 6.65%. This is an increase of 358 bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price gains through Jan-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have slowed down by 35 bps to 6.49%.
Moreover, existing home sales have fallen for twelve straight months in a row, and Zillow.com reported that home values in Jan-23 tumbled (MOM), in several formerly hot markets, most noticeably, Las Vegas (-1.3%), Phoenix (-1.3%), San Francisco (-1.0%), and Los Angeles, CA (-0.9%). Table 1 shows the deceleration of housing.
How long does it take for home price declines to filter into the rental market. First it must be pointed out that Table 1 highlights the strong seasonal slowdown in month-over-month (MOM) rent growth (RRA3bd, column 6). This rental seasonality (declines in the winter) is not concurrent with housing seasonality (declines in the fall). 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 is 4.70% which suggests the shelter cost of CPI is not going to fall below 4.00 percent anytime soon.
We also see in column 9 that YOY growth in rental rates on apartments in multi-unit structures is still positive but now growing at a slower rate (5.42% vs 5.84% last month). To get a micro-sense of how rents are changing with prices, Chart 1 shows both the month-over-month increases in home prices (HPA) and in rental rates (RRA) as of Jan-23 for our 20 CBSAs.
The chart shows that RRA loosely declines with HPA as we move to the left. The red bars show the significant declines in rental rates for 3-bedroom property and the much slower decline for rents apartments in multi-unit buildings.
In the face of higher mortgage rates, there are some reasons for the still amazingly strong home price growth we see in Table 1, but which now are beginning to reverse themselves:
Mortgage rates are still historically low
People rushing to buy homes before rates go up even more
Migration out of high-priced California
Migration out of Central and South America to Miami
The job market remains very strong
Millennials moving into their childbearing age and trying to get out of their parent’s houses.
Because vacancy rates are low, the declines in rents for 3 bedroom detached properties and apartments that we see in Table 1 and Chart 1 are probably due to seasonality. Rents are likely to stay high because:
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:
Although declining, these still high rental prices 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 income to shelter. To partially answer this question, we show four additional charts below. The first (Chart 2) is for three-bedroom detached properties and the second (Chart 3) is 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.