Expected rent spike adds to record inflation
Rising rents are straining household budgets and fueling higher inflation as the rental market enters its hottest stretch of the year.
Rents skyrocketed in 2021 as the economy recovered from the recession caused by the COVID-19 pandemic and a surge in demand for housing overwhelmed a meager supply of vacant units.
The average monthly rent rose 15.2 percent year-over-year in January, according to data from real estate firm RedFin, and is set to steam ahead thanks to a mix of long-term trends and pandemic-related shocks.
Rents had risen steadily before the pandemic, as housing construction fell way behind the demand for new homes. Rapidly rising housing prices also kept many would-be buyers in rental units, which, in turn, gave landlords greater incentive to raise rents.
But the recovery from the pandemic has kicked that dynamic into overdrive.
The number of new households jumped dramatically in 2021 as Americans fell back into pre-pandemic patterns, boosting the demand for housing. But the pandemic and subsequent supply chain issues severely limited construction and left renters fighting over a sparse supply of vacant units.
“The demand side of the rental market just expanded so much quicker than the supply side was ever going to be able to,” said Rob Warnock, senior research analyst at Apartment List, “especially given the challenges that the supply side had over the course of the pandemic.”
Warnock said rents are likely to rise even higher over the spring and summer as both the rental and sale markets for housing reach their yearly peaks.
“They’re going to come up faster than they would in a pre-pandemic year because we are still dealing with this major shortage of vacant apartments, but the immediate impact of the pandemic on people’s lives and on people’s day to day economic situation is so much less than it was back in 2020,” he explained.
While the U.S. economy recovered rapidly from the pandemic-driven recession, households are facing much higher prices across the board for basic necessities.
Food and energy prices spiked last year and are expected to rise even higher as Russia’s war with Ukraine upends the global supply of petroleum, natural gas, wheat and other key commodities.
Rising rents — a problem in their own right — have also played a major role in boosting inflation across the U.S. economy.
Shelter prices were one of the biggest contributors to a 7.5 percent annual increase in prices in January, according to the Labor Department’s consumer price index, the fastest annual inflation rate in more than 40 years. Rent for shelter rose 4.4 percent year-over-year in January, according to the Labor Department, and 0.5 percent in January alone.
Higher rents can also take a disproportionate toll on struggling families.
While households can adjust spending on food, energy or other goods amid high inflation, rents are fixed, and falling behind on payments could snowball into deeper financial peril.
“As the U.S. economy recovers from the effects of the COVID-19 pandemic, some increase in rent inflation should be expected, given that landlords can ask for higher rents when prospective tenants are employed and earning higher incomes,” wrote researchers at the Federal Reserve Bank of San Francisco in a report last month.
“However, the extraordinarily large increases in two leading indicators of future rent inflation — asking rent inflation and house price inflation — point to significant upside risks to the overall inflation outlook.”
President Biden sought to dramatically expand the supply of affordable housing and bring down pressure on rents through the Build Back Better Act, his stalled $1.75 trillion social services and climate plan.
While the bill would have spent $150 billion to create and refurbish millions of affordable homes, it’s unclear if any of that funding will make it into a potential future deal with Sen. Joe Manchin (D-W.Va.), whose support is key to passing any legislation in a 50-50 Senate.
“Congress needs to act, and the best thing they can do is immediately pass the Build Back Better Act so that local communities start to have the resources they need to address these challenges and make homes affordable to the lowest income people,” said Diane Yentel, president of the National Low Income Housing Coalition, in an interview.
“When it comes to a lack of affordable housing, and especially when it comes to homelessness, choosing not to act and invest in solutions increases costs.”