Summer Heat: Rent Growth Barely Cooled Down in July (July Rent Report)
Asking rents climbed by $10, or 0.5%, from June to July, according to the latest edition of the Zillow Observed Rent Index (ZORI). That brings the typical asking rent nationwide to $2,062, or 3.6% higher than one year ago, continuing a steady, 17-month-long slowdown in the annual growth rate since hitting a record-high 16.2% in February 2022.
The 0.5% monthly increase is a step down from June’s 0.6% monthly growth, but a little faster than the average pre-pandemic July increase of 0.4%, averaged over data from 2015 to 2019. This marks the first month of above-average rent growth after eight months of below or at average pace, by seasonal standards. Whether this is just a bump in the road for a market re-calibrating back to normal seasonal appreciation, or an early sign of nascent re-heating, won’t be clear until we see more data in the months to come. Nonetheless, rents are growing at a substantially slower pace than last July (1.0%), or in July of 2021 (2.0%, a record high in data back to 2015).
Summer haze: the trend from here is less clear
The midway point of the year also usually heralds a sharp cooldown in monthly rent growth. Rent growth typically slows in late summer and often turns outright negative (if barely) in October and November.
Rents have cumulatively risen 2.9% in the first seven months of this year, while historically the average cumulative growth through July, before 2020, was 3.9%.
Publicly available data continue to point toward sluggish growth ahead: A record-high 977,000 multifamily (5+ units in a building) housing units were under construction in June, at a seasonally adjusted annual rate. As those apartments, which will mostly be rented out, come to market in the next one to two years, they will add to supply, which should suppress rent growth for existing units. The vacancy rate in rental housing has also begun to rise, from its lowest levels in almost three decades, observed in 2021 and 2022.
Still, these processes of rising vacancy and more supply opening up will occur gradually, and will not happen uniformly across all markets. Another trend to watch is the depressed pace of home sales volume: Existing home sales plus newly-built single-family home sales have totaled around a mere 5-million annualized rate throughout the second quarter. Buyers are facing tremendously high mortgage costs, as 30-year mortgage rates flirt with 7%, and prices are near all-time highs. If high mortgage costs and a lack of inventory in the for-sale market deter many would-be first-time home buyers, some will rent for longer than they planned, buoying demand in the rental sector.
Monthly changes: Rents climbed especially quickly in the Northeast, while slackening in the Sunbelt.
Among the 50 largest metropolitan areas, rents rose the most on a monthly basis in Buffalo (1.4%), Virginia Beach (0.8%), Washington, DC (0.8%), Birmingham (0.8%), and New York City (0.8%).
The slowest monthly growth in rent was observed this June in Atlanta (no change), Memphis (0.1%), Riverside (0.1%), Austin (0.1%), and San Antonio (0.1%).
Annual rent growth remains fastest in Northeastern and Midwestern markets
Annual rent growth was highest in Hartford (7.0%), Providence (6.5%), Boston (6.5%), Chicago (6.0%), and St. Louis (5.7%).
The weakest year-over-year rent growth can mostly be found out west. On a year-over-year basis, rents are down 2.3% in Las Vegas and down 1.8% in Austin – deeper declines than observed in June – and have increased the least in Phoenix (0.1%), Seattle (0.5%), and San Francisco (0.6%). These include some of the markets most exposed to tech industry hiring weakness, as well as some of the top destinations to which remote workers decamped earlier in the pandemic.
The most expensive major market is New York City ($3,445), which bumped San Jose to second place with typical rents at $3,425, followed by San Diego ($3,205), San Francisco ($3,188), and Boston ($3,024). That marks the first time the New York City metropolitan area has topped the list for typical rent levels in Zillow’s data, dating back to 2015. Within the five boroughs of New York City, rents are even higher. According to StreetEasy, Zillow’s New York City brand, the median asking rent reached a record high $3,799 in July.
Annual rent inflation in the CPI continues to decelerate
The cooldown in official rent inflation, presaged by the slowdown in ZORI growth last year, is continuing apace: The annual growth rate of the Rent of Primary Residence component of the Consumer Price Index (CPI) fell from 8.66% in May to 8.33% in June. Moreover, the monthly growth rate is still hovering around a 5.8% annualized pace, which if sustained will further pull down the observed annual growth rate. The second half of 2022 featured especially hot CPI rent readings, so the year-over-year comparisons will look ever more favorable as this year wears on. It takes time for that disinflation to fully factor into the monthly CPI prints, though, and thus the large shelter component in both CPI, and the Fed’s preferred Personal Consumption Expenditure price index, will contribute to the appearance of elevated inflation for several months to come.
Rent (and generally, shelter) inflation is looming particularly large, as the annual growth rate of all other components of the CPI fell below 1% in June, from a more-than-40-year high of 10.8% in June of last year.