Steady As She Goes: Rent Growth in June Was Perfectly Average (June 2023 Rent Report)
Asking rents climbed by $12, or 0.6%, from May to June, according to the latest edition of the Zillow Observed Rent Index (ZORI). That brings the typical asking rent nationwide to $2,054, or 4.1% higher than one year ago, continuing a steady slowdown in the annual growth rate since hitting a record-high 16.2% in February 2022.
The 0.6% monthly increase is virtually identical to the average June increase of 0.6%, averaged over data from 2015 to 2019. This perfectly average pace puts an end to seven consecutive months of below-average rent growth, showing a rental market that is finally on an even keel after swinging from very slow growth in much of 2020, to overheated growth in 2021 and much of 2022, back to cooler than normal this winter.
Where do rents go from here?
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 2.4% so far this year, while the average first-half cumulative growth before 2020 was 3.5%.
Publicly available data give reason to expect continued sluggish growth. A record-high 978,000 multifamily (5+ units in a building) housing units were under construction in May, 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.
Monthly changes: Rents climbed especially quickly in the Northeast and Midwest
Rents rose the most on a monthly basis in Providence (1.2%), New York City (1.2%), Chicago (1.1%), St. Louis (1.1%), and Washington, DC (1.0%).
The slowest monthly growth in rent was observed this May in Phoenix (no change), San Antonio (no change), Atlanta (0.1%), Portland, Ore. (0.1%), and Tampa (0.1%).
Annual rent growth remains fastest in Northeastern and Midwestern markets
Annual rent growth was highest in Boston (7.0%), Hartford (6.9%), Providence (6.9%), Cincinnati (6.8%), and Chicago (6.3%). All ten of the markets with the fastest growing rent were in the Northeast and Midwest.
The weakest year-over-year rent growth can mostly be found out west. On a year-over-year basis, rents are down 1.8% in Las Vegas and down 0.8% in Austin, and have increased the least in Phoenix (0.2%), Seattle (1.0%), and San Francisco (1.2%). Interestingly, this is a mix of 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 San Jose, where typical monthly rent is $3,411, followed by the New York City metro area ($3,405), San Diego ($3,175), San Francisco ($3,168), and Boston ($3,045). This was the first month on record in which typical rents in San Diego exceeded those in San Francisco. On the eve of the pandemic, in February 2020, San Francisco rents were 29% higher than those in San Diego.
Annual rent inflation in the CPI is now decelerating measurably, as forecasts based on ZORI predicted for this spring
The cooldown in official rent inflation is now well underway: The annual growth rate of the Rent of Primary Residence component of the Consumer Price Index (CPI) fell from 8.80% in April to 8.66% in May. Moreover, the monthly growth rate is hovering around 0.5% (5.7% annualized), which if sustained will further pull down the observed annual growth rate, particularly measured against the high CPI readings from June to December last year. 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.
For a back-of-the-envelope estimate of how quickly annual CPI Rent inflation might come down, if we conservatively project forward several more months of monthly rent growth of 0.49% (a 6% annualized pace), year-over-year CPI Rent growth will fall from 8.7% in May to 6.4% by December. And of course if monthly growth keeps falling, that pace of year-over-year deceleration will be even faster.