Renters might finally see some relief from rising rental prices by 2023
The sticker stock that was encountered during the previous two years may not be as severe for renters this year.
While there’s no consensus on what rents will do exactly in 2023 — go up a little, go down a little, or stay flat, according to three forecasts — what’s clear is they are expected to return to more normal growth patterns, instead of the unsustainable, record rates seen in 2021 and 2022.
Experts believe that increasing inventory, a slower economy and a more attractive market for rent will keep rent growth under control this year.
“I think we’ll see very tepid rent growth until basically inflation is resolved,” Daryl Fairweather, chief economist at Redfin, told Yahoo Finance. “The Fed is trying to slow the economy down, they want to slow down rent inflation specifically. So, I think that’s what we should expect is for rent inflation to slow down.”
A slowdown would be a welcomed change for renters who saw median rents jump 6.2% last year and 15% in 2021 — the two highest growth rates in a century, according to Yardi MatrixThe, which forecasts that rents will flatten in the United States or fall slightly in the coming year.
The trend could already be underway. National median rent fell for the fourth consecutive month Apartment List reported that prices fell by 3% in December compared to August. That marked the biggest four-month retreat in rents since 2017, according to Apartment List, which expects “flat to modest rent growth” this year.
Redfin’s forecast is even rosier for renters, predicting “asking rents to post a small year-over-year decline by mid-2023, with drops coming much sooner in some metros.”
No boomtowns
Those metros are many of those markets that overheated in the past two years — like Austin, Phoenix, and Boise. For instance, Austin’s median asking rent declined year over year in both November and December, while the median rent in Las Vegas dropped $15 compared with December 2021, according to Redfin Market Tracker.
“Pandemic boomtowns, like Austin, have already been in decline…basically since summer. This is also true for Phoenix and Las Vegas. [and] a lot of the Utah boom towns,” Fairweather said. “I think it depends on how trendy the place got during the pandemic — if it got trendy, it means it probably was overvalued.”
After last year’s steep price rises, traditional rental markets are showing signs of slowing down. Many workers returned to these areas for work in the wake of rapid price drops. According to a report by The New York Times, the rental prices fell by 3% in New York and Los Angeles respectively last month. Apartment List.
StreetEasy economist Kenny Lee stated that the decline in the Big Apple was the largest drop in the nation after a significant runup.
“Asking rents in NYC rose to an unsustainable level relative to wages in 2022,” Lee wrote in an email. “Last summer, rent growth outpaced wage growth by 23% in the city after adjusting for inflation.”
Supply and Demand
Inventory levels versus demand are a major factor in determining where rents will go in each market.
According to a report by The Nation, Multifamily Construction is at a 50 year high across the country. Redfin’s forecast, “which means hundreds of thousands of new rental units will be available next year.”
In the pandemic boomtowns, new development soared last year, shifting the balance of supply-demand. Metro, for example, is a great example. Phoenix saw a 90% increase In 2022, construction will be more expensive than ever before due to an increase in supply.
“Once the construction catches up a little bit and the inflow slows down, then you know, you get a little bit of a correction,” Mark Palim, deputy chief economist at Fannie Mae, said, noting that many Americans are also returning to the more traditional primary markets.
The pandemic boomtowns are ‘‘just not getting the same flow,” he said.
LA and NYC have a supply-demand imbalance, which could lead to rents remaining high, even if there is some rental growth.
“This rent and housing really boils down to a very basic storyline, which is California is ranked 49 out of 50 in the states as far as housing per capita,” LC Beh, founder and realtor at Strive Real Estate, told Yahoo Finance. “Even though there is a large exodus going out of California, that amount of exodus is not sufficient to offset the increase of rent.”
New York was also one of the only metros to see an increase in occupancy rates over the previous year. This indicates that there is increasing demand. according to Yardi. Recent StreetEasy survey also found another reason that could help prop up Big Apple rents for studios and one-bedrooms: New Yorkers don’t want roommates.
“NYC renters are more willing to pay up to avoid roommates…despite potential annual savings of at least $14,500,” Lee wrote in the survey’s findings.
Other factors
The direction of rents will depend on the economic slowdown or what happens in for-sale.
“In a recession, multifamily rents typically experience short-term contractions,” Fannie Mae’s Palim said, noting he is predicting a very mild recession and a rise in unemployment. “We do think that you will see that continued deceleration of rent increases.”
The rental market also follows what’s happening in the broader housing market.
“The for-sale home market has softened quicker and more severely than the rental market,” Fairweather said. “People [that] Instead of buying a home, they rent it out. So that keeps the rental market a bit more stable.”
Some buyers who were left behind might be lured back as home prices fall and mortgage rates drop. And that’s a positive development for renters.
“When the housing market looks like it’s a really good deal, people drop out of the rental market,” Fairweather said, with the caveat that “there’s a bit of a delay in the reaction in the rental market to [home] price declines.”
Rebecca is a Yahoo Finance reporter.
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