Rent prices have exploded since the end of the COVID-19 pandemic and are unlikely to moderate, with shortages in supply and price stickiness leading to current increases, according to experts who spoke to the Daily Caller News Foundation.
The average price of rent for Americans increased 6.1% year-over-year in January, far higher than the rate of general inflation at 3.1% in that same time frame, according to the Federal Reserve Bank of St. Louis (FRED). The current sustained increase in the average cost of rent for Americans stems from a lack of supply of apartments that people can afford and the stickiness of long-term leases that have spread out the increase longer than other inflation spikes, leaving it uncertain for how long rent cost gains will continue, experts told the DCNF.
“Rent prices continue to increase greater than the overall inflation rate,” Joel Griffith, a research fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation, told the DCNF. “Although the rate of year-over-year change slowed from the 8.8% peak in April of last year, families are still feeling squeezed as rent increases faster than wage growth and inflation. The last time annual rate increases were this high for so long was in the stretch from 1977-1983. In other words, those under the age of 55 have never experienced such a rent squeeze.”
Renting unaffordability has hit an all-time high, resulting in 22.4 million households spending more than 30% of their income on rent and utilities, which is up by 2 million in just three years. The number of low-rent units, which are those rented for under $600 a month when tied to inflation, has fallen by 2.1 million since 2012, totaling just 7.2 million units in 2022.
There was a 36-year high in the number of new apartments built in 2023, totaling 440,000, with another 670,000 expected to be completed and on the market in 2024, after a number of new developments were started due to high demand following in 2021 and 2022, according to Realpage. Despite the new construction, most developments targeted upper-class customers, resulting in lower prices for high-end units but higher prices for standard units and failing to alleviate apartment shortages for average Americans, according to Axios.
The apartment boom is nearing its end; permits have been trending down and starts just tanked in Jan to lowest level since Covid; these higher completion levels can’t last much longer w/ fewer buildings being started – the slide in rent prices is nearing its end… pic.twitter.com/k57CiF1i6Q
— E.J. Antoni, Ph.D. (@RealEJAntoni) February 16, 2024
“It’s very difficult to predict the trajectory of rents in the future,” Peter Earle, economist at the American Institute for Economic Research, told the DCNF. “One of the lessons that the Fed is taking away from the present spike in inflation is that those prices are much stickier than they were assumed to be. They have been slow to react to the contractionary policy measures undertaken by the Fed for several reasons. There’s no real substituting other products or services for rent, so relative price changes don’t come into play. Additionally, there are usually natural and artificial barriers on the amount of housing available in a given city or region, which puts a floor under prices as well.”
The average lease length in 2022 was 12 months, totaling nearly 60% of all lease agreements, followed by month-to-month agreements at 31.8% and all other lengths at 8.6%, according to the Bureau of Labor Statistics.
The increase in the price of rent peaked year-over-year in March 2023 at 8.8%, later than the peak of general inflation of 9.1% in June 2022 due to a slower reaction time to cost increases, according to FRED. In total, rent prices have risen 19.5% since Biden took office, slightly higher than the 18% that overall prices have risen.
Many developers are also being constrained due to heavy debts in commercial real estate, which has seen a drop in demand due to work-from-home trends that started during the COVID-19 pandemic and an increase in debt costs from high interest rates. The constraint on the supply of rental units could be slightly alleviated through the use of commercial properties for residential purposes, Earle told the DCNF.
“There would be a stopgap but nevertheless constructive means of simultaneously addressing both stubbornly high rental prices and the growing commercial real estate problems by relaxing zoning issues where possible,” Earle told the DCNF. “Rezoning certain commercial structures and districts as residential would bring supply into the rental market, putting downward pressure on rents. At the same time, filling some of those buildings that are currently empty owing to the retreat from physical office space after COVID and general overbuilding would take some pressure off real estate loans, which are weighing on regional bank balance sheets.”
The number of office spaces that have been converted into apartments has dramatically increased over the past few years, climbing from just 12,100 in 2021 to an expected 55,300 in 2024, according to Rentcafe. The conversions are most prominent in Washington, D.C., New York City, New York, and Dallas, Texas.
The White House deferred the DCNF to a press call when asked to comment.
Will Kessler on February 28, 2024
