Rents Are Still Rising and Pumping Up Inflation

The Federal Reserve wants to see cooler inflation before cutting interest rates. The rental market remains in the way.

Rent growth has slowed from double-digit recent highs after pent-up demand caused by early pandemic lockdowns and record home prices sent rents soaring. Economists expect that decline will continue as more supply comes on line and tenants reach their limits.

But how quickly it falls to levels the Fed will find acceptable is an open question.

“Housing inflation typically runs higher than general inflation,” said Thomas LaSalvia, economist at Moody’s Analytics. “But it has to come down further than where it is right now.”

Shelter inflation, or what the government calls its measure of home and apartment rents, rose 5.7% in March compared with a year prior, well above the shelter inflation rate of about 3.3% from 2015 to 2019.

Shelter costs played a significant role in the hotter-than-expected March consumer-price index, which is expected to delay the Fed’s plans to lower short-term interest rates. The rents that apartment tenants pay to renew their leases are still rising. For apartments, renewal rents rose 4.6% in January compared with the same month a year prior, according to the property-data company Yardi Matrix. Two other data companies registered renewal rent increases of about 4% so far this year.

Rent increases for new leases on empty or available apartments, also known as asking rents, are now close to zero for the year and are considered a leading indicator for the rental market. Housing analysts say the large number of new apartments being built in many U.S. cities have helped curb the rate of asking-rent growth.

But renewal rents are proving more stubborn. In Indianapolis, Kansas City, Mo., Orlando, Fla., Miami and San Diego, renewal rents were up more than 7% in January, according to Yardi, a cost increase that is affecting renters’ opinions about the greater economy.

A Kansas City renter, Glen Mies, faces a 15% rent increase this June, a bump that would stretch the limits of his income from his job driving a cargo van for a wine distributor, he said. He intends to move.

“It’s frustrating,” he said. “It seems to me that I should be able to afford a one-bedroom, not-that-nice apartment.”

Teresa Diaz, a 67-year-old medical research assistant who rents a studio apartment in Detroit, said her landlord wanted to increase her rent by nearly 30% this month, though Diaz negotiated it down to about 12%.

“It’s delaying my retirement,” she said.

The single-family market, both for sale and rentals, continues to see gains. The median rent for a three-bedroom house is rising faster than wages in more than half of 341 counties analyzed by the property-research firm Attom.

“The fact that so few homes are available for sale in many markets clearly further helped increase rental demand for landlords and boost their bottom lines,” said Attom Chief Executive Rob Barber in a March report.

Still, many economists project that the pace of shelter inflation will keep declining through the end of the year. In addition, the government’s figures often lag behind the real price deceleration seen in the rental market by several months.

“The Fed understands the nuances within the CPI shelter inflation rate, and it’s paying attention,” LaSalvia said. He said the shelter rate is on pace to fall below 4% by the end of the year, drawing it closer to historical norms.

The next test is the spring and summer leasing season, when a large number of apartment leases come up for renewal, said Jay Parsons, head of investment strategy at the Texas property-investment firm Madera Residential.

The surge in renewals will happen when vacancies are relatively high and new supply is reaching a peak, two factors that can reduce landlords’ pricing power.

“I’d be very surprised if renewals don’t further cool,” Parsons said.

Write to Will Parker at [email protected]