Why rent inflation is ‘important to monitor’ in the future: JPMorgan

Inflation has been an ongoing nightmare, and part of the blame is due to rising rents across the country. Unfortunately for the tenants, things are unlikely to improve this year.

“There is no quick relief in rent increases,” Alan Ditmeister, chief economist at UBS, told Yahoo Finance. “It probably won’t get any worse after early next year [or] It will likely peak early next year but after that a long downward pace in rent increases has slowed and remains elevated until at least the end of 2024.”

The issue of rent inflation is linked to the larger picture of inflation amid the pandemic.

Early in the pandemic, American interest in home buying surged as COVID-19 spread and mortgage rates dropped to historic lows. Home prices soon followed, prompting some buyers to exit the market and return to renting.

That trend has intensified this year as the Federal Reserve raises interest rates to cool demand in areas like the housing market for sale, with rising mortgage rates marginalizing more potential buyers and sending rents higher.

“As the challenges for home buyers begin to increase in this high interest rate environment, we will see more people stay in rental markets for longer,” Zillow chief economist Skylar Olsen told Yahoo Finance Live. “They will have to save up or lower expectations in order to access home ownership with a lower debt burden to avoid the impact of higher prices. This means you will rent for longer.”

The Zumper National Index of Rents hit another record in July — the median monthly price for a newly listed one-bedroom apartment rose to $1,450, up 11% from a year ago.

And while New York City remained the most expensive city in the US for rents — the average cost of a one-bedroom apartment in the city was $3,780, according to Zumper — demand is also high in affordable markets in places like Tennessee and North Carolina. As people continue to migrate to these states in search of more space and a friendlier cost of living.”

Rents have increased over the past year. (Zamber)

Rent inflation ‘important to watch’

The Consumer Price Index (CPI) – the government’s measure of inflation widely monitored by the government – hit another 40-year high in June.

And while some components like energy were a large part of that increase, “Rent inflation was also strong,” JPMorgan economist Daniel Silver wrote in a recent note to clients.

“It is important to monitor given their tendency to persevere and their significant weight in the CPI basket,” Silver added.

The Bureau of Labor Statistics gives significant weight to the “shelter” component of the CPI, which is derived from rental costs rather than housing prices. According to the index, rental prices increased by 0.8% per month and 5.8% over the past year.

Silver noted that “with rent inflation … weaker than headline inflation in June, it accounted for only about 20% of the overall jump in consumer prices despite weighing 32% in the basket.”

Changes in rents over time, according to the Zillow Observed Rental Index (ZORI), indicate that “a decent portion of housing inflation has already been ‘calculated’ for the remainder of this year due to the delay in the transit of these spot rental rates to the ‘rental stock’.”

Olsen said, “Rental markets will continue to experience strong demand. Although we’re seeing early stages of rents slowing from higher levels perhaps, I think going forward, we still expect a lot of pressure in this market.”

Ditmeister noted that the situation is somewhat better for existing tenants than for new ones.

“People who stay put don’t see the pace of rent increases that people who move in are seeing,” he said. “This is especially true in the non-professionally managed sector, which accounts for nearly half of the rental stock there.” As a result, rents have not subsided.

University of California, Berkeley freshmen, Sana Soddy, right, and Sheryl Togade search for apartments in Berkeley, California, Tuesday, March 29, 2022. Millions of college students in the United States are trying to find an affordable place to live as rents skyrocket. national level, affecting seniors, young families and students alike.  Soddy is looking for an apartment to rent with three friends next fall, far from dorms but still close to classes and activities on campus.  They budgeted at least $5,200 for a one bedroom.  (AP Photo/Eric Risberg)

University of California, Berkeley freshmen, Sana Soddy, right, and Sheryl Togade search for apartments in Berkeley, California, Tuesday, March 29, 2022 (AP Photo/Eric Risberg)

Danny Romero is a reporter for Yahoo Finance. Follow her on Twitter Tweet embed

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