Rents will continue to rise, contributing to inflation, until the end of the year, economists say.
With home prices and mortgage rates so high, many potential owners are choosing to rent longer, choosing to wait for prices to normalize. But rents are also rising, helped by a housing shortage it’s raising the cost of living for millions of Americans. The national median monthly asking rent even topped $2,000 for the first time in May, according to Redfin,
All of this fuels inflation, the very enemy the Federal Reserve is trying to tackle. Housing, including rental costs and equivalent rent from landlords, or the price at which a landlord could rent their property, is approximately one third of the consumer price indexa key indicator of inflation.
In the first half of this year, rents rose 5.4% nationwide, according to a report per list of apartments. Although this is actually a slower increase than the rise in rents during the same period last year, major cities are still experiencing absurd swings in rental prices: rents in New York, for example, grew 27% over the past year, Apartment List said. The San Jose metro area, meanwhile, has seen the fastest rent growth over the past six months, while prices in Boston, Seattle – and even smaller markets like Hartford, Connecticut, and Providence, RI – also increase.
“Rents are skyrocketing as housing supply is still tight; moreover, prices are also exploding,” Jennifer Lee, senior economist at BMO Capital Markets, told MarketWatch.
““Given that housing, or owners’ equivalent rent, is over 20% of the CPI index, yes, that’s a concern as it will add to already high inflationary pressures.””
“Given that housing, or owners’ equivalent rent, is over 20% of the CPI index, yes, that is concerning as it will add to already high inflationary pressures,” she added. “Another sign that the peak of inflation is not yet here.”
With house prices showing signs of falling in some overheated markets, renters could be relieved.
“We’re seeing house prices leading rental prices by at least 12 months,” Kathy Bostjancic, chief U.S. economist at Oxford Economics, told MarketWatch.
“Eventually, a slowdown in the pace of house price increases should lead to lower rental prices – likely around mid-2023,” she added.
Even so, inflation may continue to burn low-income people and people of color – who have already struggled to stay up to date with their housing payments during the pandemic – In the coming months.
A household is considered overburdened if it spends more than 30% of its income on rent — a reality for around 46% of renters in 2019, according to the Joint Center for Housing Studies at Harvard University. That year, low-income renters made up 62% of cost-burdened households and 86% of households that spent half or more of their income on rent.
For these families, even a slight increase in rent can spell disaster, as they might not have enough financial leeway to make it work.