- Some renters are already signing up for cheaper leases across the country and they could drop even further in 2023.
- As demand slows and the number of available apartments increases, prices drop.
- Falling rents could help ease inflation and make a severe recession less likely.
If your rent increased this year, as it has for many Americans, 2023 might give you reason to celebrate.
Tom Lawler, former Fannie Mae economist, wrote in a recent real estate bulletin that he expects rents across the country to not only decline, but experience a rare “real decline” in real dollar amounts next year. And those declines are likely to spread and accelerate in 2023.
In fact, rents in the US have already started to decline in some markets. Data shows that in the third quarter of 2022, rents requested at the national level decreased by 0.4%, reflecting a change from just a year ago when demand led prices to historical highs.
Lawler’s forecast hinges on the fact that US builders are still accelerating construction even though there are fewer renters who want, and can afford, new rental units. It’s a rare story of oversupply in a real estate market that has been plagued by shortages for years.
Financial and economic fear among Americans is also driving the declines, says Anthemos Georgiades, chief executive of Zumper, an online rental database.
“We saw historic levels of migration during the pandemic, as people shifted to working from home and reimagined their living situations,” he said in a statement. “Now, with a turbulent and unpredictable economy raising recession fears, migration is slowing, occupancy rates are falling and rental prices are following suit.”
These predictions are already materializing in the rental market. According to RentCafe, although multi-family housing construction hit a maximum of 50 years, the demand for apartments is evaporating. RealPage real estate database data shows that in the third quarter of the year, a typically strong leasing period, rental demand changed”moderately negativeas leasing traffic plummeted. The October drop marked the first time in the company’s tracking history that demand turned negative during the third quarter.
The drop in rental prices could not only be a lifeline 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 toward convincing the Federal Reserve that inflation is under control and help the US avoid a significant recession that could include massive layoffs and falling home values.
“Right now, it’s a race against the Fed,” former Fed economist Claudia Sahm told Insider. “The faster those things show up in consumer price inflation, the faster inflation will come down, and the sooner the Fed will back down.”
The economic downturn is already translating into cheaper rents for Americans.
In a harbinger of what could happen in the US next year, many large cities are already experiencing declines. According to Zumper, more than half of the 100 US cities measured in its monthly national rent report saw month-over-month price declines in October. Down 0.8% and 0.7% since September, the national median rent for a one- and two-bedroom unit is now $1,491 and $1,832, respectively.
Cities that have seen rapid rent growth in recent years, including San Jose, Tulsa and Seattle, saw their rents fall compared to the previous month. Even New York City, which has seen a rental boom in recent months, saw the median price of one- and two-bedroom apartments fall by more than 2%.
And nationally, the faster price growth slows, the sooner the Fed is likely to climb again the pace of its rate hikes weighing on the economy. Since the house represents about a third From the Consumer Price Index, the monthly inflation report from the Bureau of Labor Statistics, falling rents could go a long way toward convincing the Federal Reserve that inflation is under control.
While most economists expect a recession in 2023, the severity of the recession may depend on how quickly prices fall.
Lawler’s analysis, as well as recent rental market data, suggest things are headed in the right direction.