Jerome Powell Is Going To Love This: Rents Fell For The First Time Since The Onset Of COVID-19

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Zinger Key Points
  • Federal Reserve Chair Jerome Powell said on June 14 that the Fed needs to see rents bottom out, as it is about a third of the CPI's weight.
  • According to data issued by Realtor.com on June 26, rents have fallen for the first time since the onset of the COVID-19 pandemic.

Amidst the interest rate hike campaign the Federal Reserve embarked on in March 2022, a moment of relief arrived: for the first time since the onset of the COVID-19 pandemic in 2020, rental prices saw a drop.

The news would indeed be music to Fed Chair Jerome Powell’s ears, who, during a press conference on June 14 following the Federal Open Market Committee hearing, expressed concern over the stagnant progression of rental costs.

"As a factual matter, we do need to see rents bottomed out here — or at least stay quite low in terms of their increases because we want inflation to come down and rental [costs] is a very large part of the CPI, about a third," the Fed Chair said.

Well, Mr. Powell, here it is.

What Happened: National median rents for 0-2 bedrooms for the 50 largest metropolitan areas dipped 0.5% in May for the first time year-over-year since 2020.

And while the median asking rent increased in May by $3 to $1,739 a month, it is still down $38 from the peak in July 2022, according to data issued by Realtor.com.

The price drop is anticipated to continue throughout the rest of the year, with an expected 0.9% fall in comparison to 2022, which would underscore a shift from the COVID-19 pandemic era, when rents spiked due to increased housing demand.

According to Realtor.com economist Jiayi Xu, the decrease in rental prices offers “a great relief for renters who have faced financial hardships over the years.” The fall in rent might encourage renter mobility, as previously high relocation costs prevented many from exploring new job opportunities.

Read also: U.S. Housing Starts Skyrocket To Highest Level Since 2016: Sign Of Strong Market Optimism Among Builders

Despite relief for renters, affordability remains a challenge as prices are still high. “Rents will keep falling, but not rapidly," Xu said, aligning with Realtor.com’s data which shows that smaller units, such as studios and one-bedroom apartments, have seen rent increases due to affordability driving demand.

Interestingly, regional variations exist within the overall downward trend. While rents are falling nationally, landlords are still increasing rents in areas like the Midwest and the Northeast. The more affordable areas are attracting movers, increasing demand and driving up prices.

Regions with the highest price increases include Columbus, Ohio; St. Louis, Missouri; and Cincinnati, Ohio, where rents rose by 9.3%, 7.7%, and 7.5%, respectively.

On the flip side, prices in the more expensive West and South, where rents had risen sharply during the pandemic, are now falling.

Cities with the steepest rent drops include Las Vegas, Nevada; Riverside, California; and Phoenix, Arizona, with year-over-year drops of 6%, 5.9%, and 5.7%, respectively.

The dynamics of the rental market are also affecting the commercial real estate sector.

Despite a challenging 2023, commercial real estate stocks including Vornado Realty Trust VNO and SL Green Realty Corp SLG are seeing a rally. For instance, Vornado Realty is up 9.5% on Monday.

While the overall decline in rents might impact landlords’ profit margins, it also reduces the risk of longer vacancies. In the current climate, faster rent growth might pose challenges to landlords in finding qualified tenants. As a result, many landlords may be offering incentives or lowering prices to attract tenants, particularly as more rental units are expected to come online this year and next year.

Read Next: KB Home Earnings: Door Will Swing Open To Reveal Homebuilding Industry’s Health

Photo: Shutterstock

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Posted In: NewsCommoditiesFederal ReserveMarketsTrading IdeasGeneralReal EstateHousingInflationInterest RatesJerome Powellrents
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