Rental prices are finally starting to drop from pandemic highs

After years of eye-popping price increases, renters may finally be getting some relief.

Rent prices fell 0.5 percent in May compared with the year before, according to data from Realtor.com released Monday. The firm’s tracking showed that to be the first year-over-year drop since early in the pandemic, when strong consumer demand collided with a lack of available apartments and homes. The median asking rent - essentially what landlords advertise for a vacant unit - was $1,739, down by $38 from July 2022′s peak. Still, that figure was up by $3 from the prior month and $344 higher than the same time in 2019.

That’s welcome news for millions of American renters, many of whom have forced their budgets to stretch each time a new payment is due. But there is still a long way to go: Housing costs are still by far the main factor driving inflation. And solving the problem depends on myriad factors, from the Federal Reserve’s fight to cool the economy to the affordability of new units coming online.

“It has been a long time coming,” said Danielle Hale, chief economist at Realtor.com. “But it does beg the question of how far will rents dip?”

For months, economists, housing experts and tenants alike have been waiting to see a turn in the rental market. Costs escalated throughout 2020 and 2021 - as people worked from home and reconsidered where they wanted to live or whom they lived with - before peaking in mid-2022.

As price growth slowed down, the expectation was that the effects would be most pronounced in the latter half of 2023, as leases from the previous year rolled over. That doesn’t necessarily mean rent costs will suddenly drop. But they are no longer rising uncontrollably.

“The image I have in my head is like a balloon that floats quickly to the ceiling, and then it’s on the ceiling sort of bouncing around,” said Igor Popov, chief economist at Apartment List. “Rents are kind of sitting on the ceiling like a balloon that just floated up.”

Popov added: “On the one hand, it’s good the balloon stopped floating up. But for a lot of renters, it’s still hard to grab it.”

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The shift in the rental market is showing up in high-frequency industry data on sites such as Realtor.com. Apartment List’s June report also showed that rent growth is flattening at a time of year when it normally picks up steam. But a broader pivot will take much longer to surface in government inflation data, which lags other industry indicators and measures rent costs somewhat differently. (The Bureau of Labor Statistics’ consumer price index, for example, is meant to approximate rent that everyone pays, not just the costs of vacant units.)

The most recent inflation report showed that rent rose 0.5 percent in May over the month before, only a minor improvement from a 0.6 percent increase in April. Rental costs were still up 8.7 percent from a year earlier. Inflation generally is still well above normal levels, and housing costs are a major reason.

Still, there’s reason for optimism: About 1 million multifamily rental units are slated to come online later this year and next, Popov said. But there is the open question of whether those new units - many of which will skew toward the higher end of the market - will meet all kinds of demand in different cities and at varying price points.

“The problem is that, even if the new leases were rolling over, it still takes a long time for that to show up,” said Diane Swonk, chief economist at KPMG. “There are these lags that are really important. We do know a lot of space is coming online, and that’s good news. But the housing market is still getting bidding wars on what little supply there is out there.”

What happens with rent will be crucial in determining whether the housing market can surmount other inequities. On one end of the spectrum, evictions in many cities are rising after pandemic-era protections expired. Some tenants can lose their homes if their rent suddenly increases and they can’t swallow hundreds of dollars more per month. Swonk said the reinstatement of student loan payments in October will strain budgets for some renters even more.

Meanwhile, home prices are falling around the country after skyrocketing during the pandemic. But location makes a huge difference. In the past year, dense urban areas generally have seen slower growth and even falling prices. But suburban and rural areas continue to see upticks, according to a Washington Post analysis of home value data from Black Knight, a mortgage and real estate technology and data provider.

The Fed’s bet is that its fight to slow the economy will continue cooling the housing market, too. The Fed’s sprint to hike its benchmark interest rate sent other types of rates soaring, with the 30-year fixed mortgage rate cresting above 7 percent last year. It still hovers well above 6 percent - a significant bump from late 2021, when rates were below 3 percent.

That has helped cull some demand for new homes. But it has not translated to a whopping drop in home prices or zapped the housing market altogether.

At a news conference earlier this month after the Fed left rates unchanged for the first time since March 2022, Fed Chair Jerome H. Powell said he expects costs in the housing market to normalize. Much of the central bank’s success in cooling the economy will rest on that forecast proving right.

“You are seeing there that new rents in new leases are coming in at low levels. And it’s really a matter of time as that goes through the pipeline,” Powell said. “In fact, I think any forecast that people are making right now about inflation coming down this year will contain a big dose of - this year and next year - will contain a good amount of disinflation [coming] from that source.”