- Some renters are already signing cheaper leases across the country, and they could drop further in 2023.
- As demand slows and the number of available apartments ramps up, prices are going down.
- Falling rents could help ease inflation and make a severe recession less likely.
This story originally appeared on Business Insider.
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If your rent spiked this year, as it did for many Americans, 2023 could give you reason to celebrate.
Tom Lawler, a former Fannie Mae economist, wrote in a recent real estate newsletter that he expects rents across the country to not just slow down, but to experience a rare “actual decline” in real dollar amounts next year. And those declines are likely to spread and accelerate in 2023.
In fact, rents across the US have already started to decline in some markets. Data shows that in the third quarter of 2022, national asking rents declined by 0.4%, reflecting a shift from just a year ago when demand drove prices to historical highs.
Lawler’s forecast hinges on the fact that US builders are still ramping up construction despite there being fewer renters who want — and can afford — new rental units. It’s a rare storyline of excess supply in a housing market that has been weighed down by shortages for years.
Financial and economic fear among Americans are also driving the declines, says Anthemos Georgiades, CEO of Zumper, an online rental database.
“We saw historic levels of migration throughout the pandemic, as people switched to working from home and re-imagined their living situations,” he said in a statement. “Now — with a turbulent, unpredictable economy causing fear of recession, migrations are slowing, occupancy rates are falling and rent prices are following suit.”
These predictions are already materializing in the rental market. According to RentCafe, although multifamily housing construction hit a 50-year high, apartment demand is evaporating. Data from real estate database RealPage shows that in the third quarter of the year — a typically robust leasing period — rental demand turned “moderately negative” as leasing traffic plummeted. October’s decline marked the first time in the company’s tracking history that demand turned negative during the third quarter.
The decline in rent prices might not only be a lifesaver for Americans’ bank accounts, but for the entire US economy as the Federal Reserve continues raising interest rates in an effort to cool prices. Falling rents could go a long way to convincing the Fed that inflation is under control and helping the US avoid a significant downturn that could include mass layoffs and plunging home values.
“Right now, it’s a race against the Fed,” former Federal Reserve economist Claudia Sahm told Insider. “The faster those things show up in consumer price inflation, the faster the inflation steps down, the sooner the Fed will back off.”
The economic downturn is already translating to cheaper rents for Americans
On a personal level, American renters will rejoice in lower rents following a record 17.6% increase in 2021 and additional hikes earlier this year.
In a harbinger of what could happen across the US next year, many big cities are already seeing declines. According to Zumper, more than half of the 100 US cities measured in its monthly national rent report posted month-over-month price declines in October. Falling 0.8% and 0.7% from September, the national median rent for a one and two-bedroom unit now stands at $1,491 and $1,832, respectively.
Cities that experienced rapid rent growth in recent years, including San Jose, Tulsa, and Seattle, all saw their rents fall compared to the prior month. Even New York City, which has reported booming rents in recent months, saw the median price for both one and two-bedroom apartments fall over 2%.
And on a national level, the quicker price growth slows, the sooner the Fed is likely to scale back the pace of its rate hikes that are weighing on the economy. Given that housing accounts for roughly a third of the Consumer Price Index, the Bureau of Labor Statistics’ monthly inflation report, falling rents could go a long way to convincing the Fed inflation is under control.
While most economists expect a recession in 2023, the severity of the downturn may depend on just how quickly prices ease.
Lawler’s analysis, as well as the recent rental market data, both suggest things are trending in the right direction.
