Actions by the Federal Reserve to slow the economy have led to the weekly 30-year fixed rate mortgage (FRM) on August 31, 2023, ending at 7.18%. This is an increase of 411 bps since the end of Nov-21 when it was 3.07%. Concurrently, the year-over-year home price gains through Jul-23 for the 20 CBSAs tracked by this report (the CHTR 20-city index) have flattened (Column 4 in Table 1 below).
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 Jul-23 was 4.75%. 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.
We also see in column 8 that YOY growth in rental rates on apartments in multi-unit structures is still positive and grew at a slightly slower rate in Jul-23 (2.83% vs 3.28 prior month). 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 Jul-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 (RRAapt) are small positive values. As we move from left to right, the dotted bars show mostly negative changes and then they turn into positive increase in HPA across CBSAs. The red bars show the significant one month increase in rental rates for 3-bedroom property and the much slower increases for rents on apartments in multi-unit buildings (which have turned downward again). Higher mortgage rates have deflated the home price bubble, but not the rent bubble. It is important to note:
It takes three months for HPA to filter into RRA3bd and RRAapt.
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 income:
Rents are mostly rising at a rate above 3.0% per year. 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. 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 55 percent of their income 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 Jun-20 to Jul-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 before the exogenous Covid-19 health shock.
Renters are now paying more than 20 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, in only three CBSAs, renters are paying less out of their income.
The increased economic hardships now facing renters show up even more so in Chart 5. In that chart, we see that renters of apartments in 16 of the 20 cities that we track are now paying significantly higher rents relative to their income than they had been paying before the rates decline in 2020.
