without investment > Summer Heat: July Rent Growth Shows Mild Cooling (July Rent Update)

Summer Heat: July Rent Growth Shows Mild Cooling (July Rent Update)

Insights Sharing According to the latest edition of the Observed Rent Index (ORI), asking rents increased by $10, marking a 0.5% rise from June to July.

This brings the average asking rent across the nation to $2,062, indicating a 3.6% uptick from the same period a year ago.

This ongoing trend aligns with a steady slowdown in the annual growth rate over the past 17 months, following a peak of 16.2% in February 2022.

The incremental 0.5% increase during July is a slight step back from the 0.6% monthly increase recorded in June.

Nonetheless, it slightly exceeds the pre-pandemic July average increment of 0.4%, calculated based on data from 2015 to 2019.

This development signifies the first month displaying above-average rent expansion after an eight-month period of subpar or at-par velocity in accordance with seasonal norms.

Whether this indicates a temporary deviation during the recalibration of the market towards conventional seasonal appreciation or an early indication of potential heating, remains uncertain until subsequent months’ data emerges.

However, it’s important to note that rent growth is notably less robust than the rates seen in July of the previous year (1.0%), or even July 2021 (2.0%, a peak within data spanning back to 2015).

Summer Trends: Unclear Trajectory Ahead

Typically, the midpoint of the year introduces a significant deceleration in monthly rent escalation.

Rent growth commonly slows down during late summer and may even dip into negative territory, albeit marginally, in October and November.

Cumulatively, rents have risen by 2.9% during the first seven months of this year. Historically, the average cumulative surge through July, before 2020, was 3.9%.

Publicly available data consistently point towards modest growth in the near future.

In June, a record-high count of 977,000 multifamily housing units were under construction, extrapolated to a seasonally adjusted annual rate.

As these units are predominantly intended for rent, their introduction to the market over the next one to two years will augment supply, thereby curbing rent growth for existing units.

Simultaneously, the rental housing vacancy rate, after reaching its lowest levels in nearly three decades in 2021 and 2022, has begun to rise.

However, the gradual nature of these shifts in rising vacancy and increased supply implies that their impact will not be uniform across different markets.

Another noteworthy trend is the stagnant pace of home sales volume.

Throughout the second quarter, the total volume of existing home sales coupled with newly-constructed single-family home sales hovered around a mere 5 million annualized rate.

High mortgage costs, with 30-year mortgage rates inching towards 7%, coupled with elevated prices nearing record highs, present considerable obstacles for potential buyers.

If the combination of exorbitant mortgage expenses and the scarcity of available homes in the for-sale sector discourages potential first-time homebuyers, a portion of them may opt to rent for an extended duration, thus bolstering demand within the rental domain.

Monthly Transformations: Northeast Sees Swift Uptick, Sunbelt Slows Down

Among the top 50 metropolitan areas, Buffalo experienced the most substantial monthly rental increase (1.4%), followed by Virginia Beach (0.8%), Washington, DC (0.8%), Birmingham (0.8%), and New York City (0.8%).

Conversely, the slowest monthly growth transpired in Atlanta (unchanged), Memphis (0.1%), Riverside (0.1%), Austin (0.1%), and San Antonio (0.1%).

Annual Rent Growth Still Dominates Northeastern and Midwestern Markets

In terms of annual rent growth, Hartford leads the pack (7.0%), trailed by Providence (6.5%), Boston (6.5%), Chicago (6.0%), and St. Louis (5.7%).

On the opposite spectrum, the most subdued year-over-year rent growth predominantly stems from western regions.

Year over year, Las Vegas experiences a 2.3% decrease, while Austin records a 1.8% dip, both surpassing the declines witnessed in June. In contrast, the slightest upswing in rent growth is found in Phoenix (0.1%), Seattle (0.5%), and San Francisco (0.6%).

These areas include markets heavily influenced by tech industry hiring fluctuations and popular remote work destinations during the initial stages of the pandemic.

Most Expensive Metropolitan Market Takes a Turn

New York City emerges as the priciest major market ($3,445), dethroning San Jose, which now stands second with a typical rent of $3,425. Following suit are San Diego ($3,205), San Francisco ($3,188), and Boston ($3,024).

This marks the inaugural instance where the New York City metropolitan region leads the list for typical rent levels in data spanning back to 2015. Within New York City’s five boroughs, rents reach even higher peaks, as per StreetEasy’s data.

Deceleration of Annual Rent Inflation in the CPI Persists

The diminishing momentum of official rent inflation, heralded by the ORI growth slowdown last year, persists.

The annual growth rate of the Rent of Primary Residence component of the Consumer Price Index (CPI) dwindled from 8.66% in May to 8.33% in June.

Furthermore, the monthly growth rate lingers around an annualized pace of 5.8%. If sustained, this rate will continue to pull down the observed annual growth rate.

The latter half of 2022 exhibited particularly heightened CPI rent indicators, making year-over-year comparisons increasingly favorable as this year unfolds.

While it requires time for this disinflation to fully manifest in monthly CPI figures, the significant role of shelter within both CPI and the Fed’s preferred Personal Consumption Expenditure price index will contribute to the persistence of elevated inflation for several months to come.

Rent inflation, particularly within the shelter category, looms prominently, as all other CPI components clock in an annual growth rate below 1% in June. This contrasts significantly with the more than 40-year peak of 10.8% observed in June of the previous year.

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