Rent peaked where it matters most. Here’s what happens next
Federal inflation data showed rent inflation dropped in April, about a year after rent growth rapidly slowed. Three economists explain why it took so long for that to happen and what it all means
Last month, rent’s impact on inflation was lower than it was in March, according to data from the Bureau of Labor Statistics.
It was a moment economists had expected for about a year, and it has implications for everything from interest rates to overall inflation.
The price of shelter makes up about a third of the inflation index. And while the real-time price of new leases has been quickly falling each month for about a year, the cost of shelter was still keeping inflation well above federal targets.
“It’s really the one part of CPI where CPI relies on a lagging indicator,” said Jay Parsons, chief economist for the rental data firm RealPage. “You look at food and gas, energy costs. [In] all these different categories, pretty much, the sticker prices you see are what’s reflected in CPI. Rent is very different.”
For the past three years, real-time rent growth reached record levels, peaked and quickly fell. Meanwhile, the impact that had on inflation was slow to appear in the numbers.
Comparing the Zillow Observed Rent Index and the cost of shelter in inflation. Graph by MacroMicro
While the Zillow Observed Rent Index showed rent was nearly 17 percent more expensive in February 2022 than a year earlier, rent’s impact on inflation would keep climbing for another year before finally beginning what economists expect will be a gradual drop throughout 2023.
“That has to work its way throughout the market,” said Danielle Hale, chief economist for Realtor.com.
There are signs that that’s beginning to happen.
Rent finally peaked where it counts
March 2023 will likely be a high water mark for rent’s impact on driving up inflation and keeping it high, experts said.
“It’s really playing out as expected,” Parsons said. “Right on schedule we’re seeing, finally, a turndown in the rental inflation one year after we saw that in the private sector data.”
While the year-over-year decline in the April data was small, economists expect the price of shelter will continue falling throughout the year as the federal government releases its inflation data.
“It seems pretty likely that that was the peak for shelter inflation given the weakness that we’ve seen in market rents that goes all the way back to January of 2022,” Hale said.
Rent is still much higher than it was in 2020
While the rate of growth has slowed significantly from record highs, it still grew at two to three times above the historical rent increase every year and is well above where it was before the pandemic.
The typical rent in March 2019 was $1,538 a month, according to Zillow. In March 2023, the typical rental cost was $1,996.
“If you look at it over the last four years you’re still looking at rent that’s up almost 25 percent compared to four years ago,” Hale said. “So it’s not surprising to see rent growth slow down.”
Danielle Hale | Realtor.com chief economist
And while the rate of growth nationwide is within a typical range — somewhere between 2 percent and 4 percent, CoreLogic Chief Economist Molly Boesel said — it is still growing very quickly in certain markets.
Rent was 7.7 percent more expensive in Charlotte in March 2023 than a year before, according to the latest report on single-family rent from CoreLogic. (Zillow put rent growth in Charlotte at 6.6 percent.) It’s also growing quickly in markets like Boston and Orlando, according to the reports.
There are no indications that the nation could enter another period of rapid rent growth, Boesel said. In fact, if the nation slips into a recession, rent growth could slow further.
Rent inflation may not fall as fast as rent did
Each of the private companies that keep track of the price of rent in real time has found roughly the same thing.
Rent began spiking shortly after COVID started as people sought more personal space. The rental vacancy rate fell, competition for rentals rose and prices quickly rose.
Then after a peak just over a year ago, the growth in the price of rent rapidly decelerated.
