September 2017 Market Report: U.S. Rent Growth on the Rise Again
- U.S. home values rose 6.9 percent year-over-year in September, to a Zillow Home Value Index (ZHVI) of $202,700.
- Rents across the country are up 2.1 percent year-over-year, to a Zillow Rent Index (ZRI) of $1,430 per month. After slowing in 19 of the past 21 months, annual rent growth has accelerated in each of the past five.
- Home shoppers will continue to have few homes to choose from as we enter the last few months of the year – there are 12 percent fewer homes on the market than a year ago.
Don’t look now, but after a largely uninterrupted, almost two-year slowdown, U.S. rent growth is picking up again.
After peaking at annual growth of 6.6 percent in July 2015, the U.S. Zillow Rent Index (ZRI) fell or remained flat from the prior month in 18 of the next 21 months, bottoming at 0.6 percent annual growth in April of this year, according to the September Zillow Real Estate Market Report. But since then, the annual pace of growth in the U.S. ZRI has picked up in each of the past five months compared to the month prior, growing 2.1 percent year-over-year in September to a national median rent of $1,430.
Yes, the current 2.1 percent annual growth in ZRI is a far cry from growth of 6 percent or more experienced just a few years ago. But the uptick is notable on the heels of such a long decline, and could indicate that a surge of newly built apartments nationwide is beginning to come on line (in some markets massively so) and and after an initial impact, markets are stabilizing as they absorb this new supply. The re-acceleration in rents will also impact rental affordability, which had been improving somewhat as rental growth cooled and income growth remained strong the past few months at around 2.5 percent per year.
As of Q2, the typical renter making the nation’s median income and looking to rent the median home could expect to pay about 29.2 percent of their income to their landlord each months. This share is well above historic norms, but modestly below the 29.6 percent share they would have to pay in Q2 2015, around the time rental growth peaked. Slower rental growth and decent wage growth likely gave many renters a chance to breathe and to save more of their earnings to potentially put toward a down payment on a home and transition from renting to owning – potentially contributing to currently very high home buyer demand. As rent growth re-accelerates and if/when it equals or even exceeds income growth, many renters might lose whatever savings cushion they may have enjoyed the past few years.
And in many individual markets, rents are already growing much faster than the national pace. Among the 35 largest metro areas analyzed by Zillow, rents grew the fastest year-over-year in Riverside (up 6 percent YoY to $1,833/month), Seattle (+5.5 percent, to $2,189), Minneapolis (+5.1 percent, to $1,617), Portland, Ore. (+4.7 percent, to $1,863) and Los Angeles (+4.5 percent, to $2,714).
And looking ahead over the next year, rent growth in many of these markets is expected to keep getting faster. According to the Zillow Rent Forecast, median rents through September 2018 in Seattle and Riverside are expected to grow 6 percent and 6.2 percent, respectively, both above current annual growth rates. And rapidly appreciating rents in markets including Atlanta (expected to rise 8.7 percent over the next year, from 4.3 percent currently) and Denver (forecasted to rise 5.7 percent, from 1.6 percent) would place them squarely on that top five list next year. Rents are expected to grow faster over the next year than they have over the prior year in 24 of the top 35 largest markets nationwide covered by Zillow.
Low Inventory Still Keeping Pressure on Home Values
On the home buying front, the national median home value rose 6.9 percent year-over-year in September, to a Zillow Home Value Index (ZHVI) of $202,700. The U.S. ZHVI has grown year-over-year in each of the past 62 months, dating to August 2012. Among the 35 largest metros, Seattle and San Jose reported the fastest home value appreciation over the past year. In Seattle, home values are 12.4 percent more valuable than at this time last year. Home values were up 10.3 percent from a year ago in San Jose. Rounding out the top-five list of fastest-growing metros in September were are Las Vegas (+10.2 percent), Charlotte, N.C. (+9 percent) and Orlando, Fla. (+8.9 percent).
Tight inventory and strong demand are the two key factors driving up home values: When supply is low and demand is high, prices rise. Nationwide, there are 12 percent fewer homes to choose from than a year ago. Of the top 35 metros, overall inventory has dropped most significantly in San Jose, Seattle and San Diego over the past year. In San Jose, there are 60 percent fewer homes on the market than at this time last year, and 35 percent fewer in Seattle and San Diego.
Low mortgage interest rates are contributing to high demand in part by keeping home buying affordable even as prices rise. Unlike with rents, the share of income needed to afford a typical mortgage nationwide is currently much lower than it was historically, thanks in large part to low mortgage rates that keep monthly costs low. Mortgage rates[i] on Zillow ended the month of September at 3.70 percent, the lowest month-ending rate since May 2017. Mortgage rates hit a high of 3.72 percent in the last few days of the month[ii] with the month low at 3.56 percent[iii].
In general, job growth has been widespread and strong enough to create a number of hot spots nationwide where opportunities are growing and attracting home buyers – and these areas aren’t just limited to the coasts, but also include smaller, inland markets like Charlotte and San Antonio. In these growing markets, heightened demand is being met with limited supply of homes for sale, which naturally causes prices to rise. But that limited supply/high demand dynamic isn’t limited to just those markets with the best job opportunities – it’s a widespread phenomenon impacting high-growth metros like Seattle and slower-moving markets like Indianapolis.
Especially in some of the fastest-moving areas, where home values are growing 10 percent or even 12 percent per year, it might be easy to see such rapid growth and assume another bubble is emerging – but don’t worry. The market is reacting to basic economic laws, and is behaving exactly the way we would expect it to given good overall growth, limited supply of homes for sale and decent housing affordability thanks to low mortgage interest rates.
[i] Mortgage rates for a 30-year fixed mortgage.
[ii] Month high on September 28, 2017.
[iii] Month low occurred on September 6, 7 and 8.