Rent Growth Below Average as Subdued Spring Leasing Season Persists in May
Editor’s Note 6/6/2023: This post has been corrected from an earlier version, reflecting revised data. We apologize for the error and any confusion it may have caused.
Asking rents climbed by $13, or 0.6%, from April to May, according to the latest edition of the Zillow Observed Rent Index (ZORI). That brings the typical rent price nationwide to $2,048, or 4.8% higher than one year ago, continuing a steady slowdown in annual growth rates ever since the record-high growth rate of 17% observed in February 2022.
The 0.6% monthly increase is slightly smaller than the typical May increase of 0.7%, averaged over data from 2015 to 2019. That difference is minuscule on its own, but as the eighth consecutive month with below-average monthly growth, it makes one more point in a trend. The year-to-date rent growth of 1.9% is well below the 2.7% average cumulative growth observed in the first five months of the year in pre-pandemic ZORI data. That suggests that overall leasing conditions are still somewhat cool for this time of year, so what growth we have seen is driven mainly by seasonal factors.
The subdued pace of rent growth this year may represent some mean reversion after the very fast rent growth in 2021 and 2022 that accompanied the reopening of the economy, when Americans’ household balance sheets were flush with cash. Now, renters may be tightening their budgetary belts and doubling up with roommates as higher costs and lower excess savings make it less tenable to rent a place of their own. The most recent quarterly Homeownership and Vacancy Survey showed a rental vacancy rate of 6.4% in the first quarter, the highest rate since the second quarter of 2021, when vaccines became universally available to adults in the U.S.
Monthly changes: Rents climbed especially quickly in more affordable cities
Rents rose the most on a monthly basis in Providence (1.6%), New York City (1.2%), Chicago (1.2%), San Diego (1.2%), and Columbus (1.2%).
The slowest monthly growth in rent was observed this May in Portland, Oregon (-0.0%), Atlanta (0.2%), New Orleans (0.3%), Los Angeles (0.3%), and Miami (0.3%).
Annual rent growth remains fastest in Northeastern and Midwestern markets
Annual rent growth was highest in Cincinnati (7.9%), Boston (7.7%), Providence (7.5%), Kansas City (6.9%), and Louisville (6.8%) — the same five metro areas as last month, but with slight changes to the order. The only market outside the Midwest and Northeast to crack the top 10 was San Diego, in ninth place with 6.2% year-over-year rent growth.
The weakest year-over-year rent growth can mostly be found out west. On a year-over-year basis, rents are down 1.4% in Las Vegas, and have increased the least in Phoenix (0.4%), Austin (0.8%), Salt Lake City (1.5%), and Sacramento (1.6%). Other very slow growers, on an annual basis, include San Francisco (1.7%) and Seattle (2.0%), which may still be feeling the effects of tech industry layoffs and the shift to remote work.
The most expensive major market is San Jose, where typical monthly rent is $3,355, followed by New York ($3,336), San Francisco ($3,151), San Diego ($3,097), and Boston ($3,026).
Annual rent inflation has begun to decline in the CPI (just barely), as forecasts based on ZORI predicted for this spring
Last month’s encouraging pause in the annual growth rate of the Rent of Primary Residence component of the Consumer Price Index (CPI) continued in April, as annual growth just barely ticked down from 8.81 to 8.80%. When rounded to 8.8%, that is still the highest rent inflation rate in 40 years, but as the monthly growth rate stays comfortably below 7% (annualized), the annual growth rate should begin to bend downward very soon. For the time being, rent inflation will be a major contributor to overall inflation in the CPI and the Fed’s preferred Personal Consumption Expenditures price index, but we now have reason to expect that the slowdown in asking rents over the past year will feed through to cooling inflation in the months to come.