Slowing Rent Growth: Promising Signs for the Economy and Future Homebuyers

facebook iconTwitter iconLinkedin icon

In recent months, the pace of rent growth has significantly slowed, bringing potential benefits to both the economy and future homebuyers. This trend, where rent increases are falling behind inflation and wage growth, suggests a positive outlook for the housing market and the overall financial landscape.

Construction of rental units has eased demand, resulting in minimal annual rent growth. The slowdown in rental price growth could further cool inflation in the coming months, which, in turn, may ease mortgage interest rates. Additionally, if wage growth continues to outpace rent increases, renters will be in a better position to save for a down payment and pursue homeownership.

Recent reports indicate a shift in the rental market, with the construction of new apartment complexes and multifamily homes creating a surplus of available units. As a result, the demand for rentals has stabilized, leading to minimal annual rent growth. NAR's April Rent Report reveals that median rent across the top 50 metros in the United States increased by just 0.3% year-over-year, the lowest growth rate since the beginning of the pandemic over three years ago. Redfin's April report also supports this trend, with a mere 0.3% year-over-year rise, marking the 11th consecutive month of slowing growth.

What makes this slowdown in rent growth particularly notable is that it now lags behind the inflation rate and wage growth. An analysis by Beekin and CJ Patrick Company found that rental price increases for both single-family rental properties and multifamily units trailed the consumer price index and wage growth in the first quarter of 2023. Out of the 74 single-family rental markets studied, only one market, Savannah, Georgia, experienced a year-over-year increase higher than the consumer price index. The rental prices for multifamily units rose by just 3.34%, while single-family rentals actually declined by 2.72%.

This deceleration in rent growth has a positive impact on renters and the broader economy. It provides relief to renters who have faced significant rent increases in recent years. Moreover, as the federal government aims to tame inflation, the slowdown in rental price growth contributes to cooling down overall inflation. This, in turn, may lead to a decrease in mortgage interest rates, increasing affordability for potential homebuyers if home prices remain stable.

The correlation between wage growth and rent increases is another factor to consider. If wage growth continues to outpace rent increases, renters will have the opportunity to save more for a down payment. This puts them in a better position to transition from renting to homeownership.

The increase in multifamily construction has been a significant factor in the slowdown of rent growth. The NAR report highlights that this surge in construction has pushed the vacancy rate to 6.4% in the last quarter, reaching the highest level in two years and approaching the average vacancy rate between 2013-2019, which stood at 7.2%. As a result, 49 out of the 74 markets analyzed in the Beekin report experienced year-over-year declines in rental rates. Markets such as Colorado Springs, Colorado; Clarksville, Tennessee; and Lakeland, Florida saw the largest price decreases.

It is worth noting that many of the markets that have witnessed declines in rental rates are the same ones that experienced rapid growth during the early stages of the COVID-19 pandemic. Similar trends have been observed in the owner-occupied housing market, with metro areas like Phoenix and Boise also experiencing declines in both home sales and prices.

The current slowdown in rent growth indicates a shift in the rental market dynamics. With an increase in rental supply due to ongoing construction, the balance of power is shifting back towards tenants. This increased supply is giving renters more leverage and bargaining power in negotiations, contributing to improved affordability in some areas.

The implications of slowing rent growth extend beyond the rental market itself. As housing costs, including rental rates, are significant components of the consumer price index, the current trends suggest a positive outlook for the U.S. economy. The slowdown in rental price growth, coupled with the potential cooling of inflation, bodes well for the future economic landscape. Lower inflation numbers in the coming months could lead to lower mortgage rates, making homeownership more accessible and affordable for aspiring buyers.

Moreover, the favorable relationship between wage growth and rent increases further enhances the prospects for future homebuyers. When wage growth outpaces rent increases, renters are afforded the opportunity to save more for a down payment, bringing them closer to achieving their homeownership goals.

In navigating the evolving real estate landscape, it is essential for prospective homebuyers to remain informed and proactive. Monitoring market trends, staying updated on rental prices, and assessing the balance between supply and demand are crucial steps. EffectiveAgents can assist buyers in finding top-performing real estate agents who possess the expertise and market knowledge necessary to guide them through the homebuying process successfully.

The current slowdown in rent growth indicates promising times ahead for the U.S. economy and future homebuyers. With rental prices falling behind inflation and wage growth, there is potential for lower mortgage rates and increased affordability but analysts at EffectiveAgents expect this to take a while (possibly even a year or two). The construction of new rental units has eased demand, providing tenants with more bargaining power and improved affordability. As the rental market stabilizes and wage growth continues to outpace rent increases, renters are presented with the opportunity to save for a down payment, bringing them closer to homeownership. 

Share On Social

author image
about the author
Effective Agents
Real Estate Company

Let’s Get Started