Rent Growth Is Slowing, But Housing Won't Be Affordable Anytime Soon

The pace of growth in U.S. home rents slowed in September to its lowest rate in 16 months — but the hugely elevated post-pandemic cost of renting a home is not likely to subside anytime soon.

The average monthly rental cost for homes of between zero and two bedrooms in the U.S. was $1,760, according to data from Realtor.com shared exclusively at the National Association of Real Estate Editors conference in Atlanta.

That is 7.8% higher than a year earlier, the slowest rate of growth since early 2021. 

A recent sharp rise in inflation and interest rates has made homeownership less viable. Coupled with limited new supply, it means that even as rents become less affordable for the average American, they are unlikely to drop significantly anytime soon. 

The stable income provided by apartments at the more affordable end of the spectrum is attracting investors to the sector from across the globe, the conference heard. But despite voracious appetite for affordable rental property in the U.S. from both investors and renters, meeting that demand is becoming increasingly difficult. 

“It’s hard to see rents coming back down to the pre-Covid normality in the next year or so,” Realtor.com Chief Economist Danielle Hale said. 

Reversing the trend seen at the height of the coronavirus pandemic, the biggest year-on-year rental increases came in large urban centers in September, led by Chicago, Boston, New York and San Jose. Rises in Chicago topped 20%.

That is an indication concerns about the coronavirus are waning, Realtor.com Vice President of Rentals Ryan Coon said.

But the spike in suburban rents that occurred during the worst of the pandemic, when city dwellers gravitated to less dense areas, has limited options for urbanites looking to make the time-honored move out of the city to save money. The average gap between city and suburban rents is now 6%, compared to a historic average of above 20%.

The Federal Reserve base rate has risen to 3.25%, compared to close to zero a year ago, with the Fed raising the rate to combat inflation at 30-year highs.

That has made owning a home more expensive than renting.

The average U.S. mortgage is now $561 more per month than the average rent, Realtor.com said, compared to a difference of $70 a month at the start of the year. That gap is pushing more people toward renting, increasing demand in a world in which supply is not keeping pace.

“The rate of multifamily construction is still growing, but it will take some time for that growth to provide any relief,” Hale said.

The elevated level of rents is eating up disposable income, which gives people less money to spend in the wider economy.

The average renter spends 26.5% of their net monthly income on rent, Realtor.com said. In a survey, it found 60% of renters felt financially stressed due to the amount they spent on rent and other home costs like fuel bills. 

The high cost of rents also hinders labor mobility. Renters who stay put at the end of their contracts are currently seeing rents rise an average $160 per month; those who choose to move are seeing a rise of $300 a month. 

The message from the development world was that little will improve in the near future in terms of increasing the supply of affordable housing.

“We are seeing so many groups who are looking for affordable housing, they see it as a form of coupon clipping,” JLL Senior Managing Director and co-head of affordable housing Doug Childers said. “It is very steady and consistent cash flow.”

Childers said nontraded REITs are looking to put significant amounts of money into the sector, as are European pension funds and investors that have raised discretionary funds. On the day of the conference, Bridge Investment Group raised $1.7B for a workforce housing fund, the largest in the history of the sector. 

But the same inflation that is leading to a hike in interest rates is stymying the ability of developers looking to create new supply of more affordable housing. 

“Construction costs continued to rise throughout the pandemic, in the fourth quarter of last year they were rising 15-20% year-on-year,” Grubb Properties Senior Vice President Paul O’Shaughnessy said. “When it comes to creating housing for the missing middle, that throws a bomb in your structure.”

When the cost of building increases, so must rents in order to make a profit. That means higher-end multifamily developers can outbid those looking to build for the missing middle — the market just above affordable housing and the sector Grubb looks to target. 

High rents are propelling investors and developers to buy up older Class-B and C properties, refurbishing them and charging Class-A rents, taking them out of the affordable bracket.

In terms of increasing supply of affordable housing, O’Shaughnessy said it will take measures like public-private partnerships that see local municipalities provide land or tax abatements.

“It’s a long-term process of building trust,” he said.