Snapshot: What’s the 411 on Rents?

October 31, 2022

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According to online rental sites, the double-digit jumps in rents that caught the attention of tenants and landlords in 2021-22 may be fading into the past.

The news of smaller rent increases - and even decreases in some areas - is encouraging for tenants and economists but may seem confusingly at odds with monthly shelter inflation figures (rent plus owner’s equivalent rent) in the CPI (Consumer Price Index). These surged to a new high in September.

Rent inflation has an oversized impact on every inflation measure the Federal Reserve watches. Since it takes up nearly a third of CPI, it can have an indirect impact on all our wallets, whether we rent or own.

So, let’s dive a little deeper into why these two indicators are moving in different directions and when and how rent de-escalation might impact renters, the Federal Reserve and the economy.

Understanding the many categories of “rent”

To understand the full picture of rent inflation, it helps to nail down some definitions first.

Popular rental websites gather data on “new lease rents” – in other words, the asking rents for units that are turning over.

The CPI, in contrast, covers rent data on both new leases and renewal leases for tenants who are staying on.

The CPI also includes an additional measure called “owner’s equivalent rent” – the amount of money a homeowner would be paying in rent to equal their ownership costs.

What you need to know today

Since each rent inflation indicator contains different information, our colleagues in Global Investment Research look at multiple sources to paint a complete picture:

If you’re a tenant looking to move, the news is good. The sticker shock on new leases is clearly lessening. Based on indicators carefully chosen by our analysts, new lease rents decelerated to an annualized growth rate of only 3% in the third quarter of 2022.
If you’re planning to stay put, you’ll likely have to adjust to a higher price. Renewal lease rates usually adjust more gradually than new because landlords are reluctant to alienate and lose existing tenants. But renewal lease growth is likely to run hotter in the near future as these units catch up to the market rates of new leases.
Our researchers estimate that this catch-up effect is boosting renewal lease rent growth to over 8% annually, driving the strength of rental inflation in the CPI. Because renewal leases still lag the new lease market rate by 3% on average, they are likely to continue rising through next year.
With new lease rents remaining close to their current range and the catch-up effect continuing, our colleagues expect CPI rent measures to rise from the current 6.8% to a peak of 7.5% next spring before slowing to under 6% at the end of 2023.
Even if new lease rents don’t grow at all next year, catch-up rent inflation is likely to keep inflation measures far above target next year. That could inspire the Fed to deliver more and/or higher hikes. And too much tightening by the Fed could push the US over the edge into a recession.

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