Ignore the Pundits, Don't Expect Big Declines in the Price of Rent

 

National Rent Report

Please consider the latest National Rent Report by Apartment List.

Our national index fell by 1 percent over the course of November, marking the third straight month-over-month decline, and the largest single month dip in the history of our index, going back to 2017. The timing of the recent cooldown in the rental market is consistent with the typical seasonal trend, but its magnitude has been notably sharper than what we’ve seen in the past, suggesting that the recent swing to falling rents is reflective of a broader shift in market conditions beyond seasonality alone. Going forward it is likely that rents will continue to dip further in the coming months as we move through the winter slow season for the rental market.

From a CPI point of view, I don't believe we will see rents decline even though the  National Rent price from Apartment List shows that. 

It's not that their data is wrong. Rather, it has to do with what they measure. First, let's consider how things look year-over-over-year.

Percent Change From Year Ago

National rent price data from ApartmentList, OER and CPI data from the BLS, chart by Mish

Chart Notes

• The National Rent Price is from ApartmentList.Com.
• OER stands for Owners' Equivalent Rent, the price one would pay to rent one's own house from oneself, unfurnished and without utilities.
• Rent of Primary residence is just what it sound like, typical rent. That number and OER are from the BLS.

Apartment List Stated Methodology

• "We calculate growth rates using a same-unit analysis similar to Case-Shiller’s approach, comparing only units for which we observe transactions in multiple time periods to provide an accurate picture of rent growth that controls for compositional changes in the available inventory."
• "We capture repeat transactions - when a single apartment gets rented more than once over time - and check whether the transacted rent price has changed between those transactions."
  
• "Rent estimates reflect prices paid by renters, not list prices for units that remain vacant."

Three Key Difference to BLS

1. Although Apartment List uses repeat rents of the same or similar unit and prices are are actual prices, not asking prices, it only shows new leases, not repeat leases.
2. Because new leases on vacant units rise much more rapidly than existing leases, its year-over-year numbers rise or fall faster and in greater magnitude.
3. The National Rent price reflects year-over-year changes, but in reality, people pay the same amount of rent for 12 months then there is one big price jump.

Point number 2 above reflects the huge 18 percent year-over-year-peak vs 7.5 percent for rent of primary residence. 

Point number 3 explains why Rent of Primary Residence and OER by the BLS are still rising. The next chart puts the setup in proper perspective.

 National Rent Price vs CPI Rent of Primary Residence 

National rent price data from ApartmentList, OER and CPI data from the BLS, chart by Mish

The strong seasonal tendencies of Apartment List are smoothed over by the BLS every year. This year will be no different.

To explain the magnitude change this year, including a record 1 percent decline in November, just look at the massive spikes this year and last that preceded it. 

Remember, ApartmentList reflects new leases not renewals of existing leases. With Covid, there was a huge increase in work-at-home and huge demand from people escaping the cities to the suburbs. 

Finally, note the time lag between ApartmentList and the CPI. 

BLS Look Ahead

The above charts provide a needed reality check to those who think rent prices are about to plunge based off Apartment List data. 

I suspect we have strong increases in rent in the CPI data despite the declines of ApartmentList for at least the rest of the year, and if so continuing into 2023.

https://mishtalk.com/economics/ignore-the-pundits-dont-expect-big-declines-in-the-price-of-rent