Rising Rents Complicates Fed's Disinflation Goal, Offers Tailwind To Residential REIT Stocks

The recent uptick in rental prices presents a mixed bag for investors, buoying the outlook for residential real estate stocks while simultaneously stirring inflationary concerns that could complicate efforts to achieve the Federal Reserve’s 2% inflation target.

What Happened: The median U.S. asking rent saw a 2.2% increase year over year in February, reaching $1,981, marking the most significant gain since January 2023, with a month-on-month increase of 0.9%, as revealed by Redfin. This rise is partly attributed to the “base effect,” given that rents were at their lowest in February 2023, leading to an amplified annual rate increase.

The rental price surge is predominantly driven by the Northwest and Midwest regions. In the Northeast, the median asking rent escalated by 5.2% year over year to $2,481 in February, the most substantial increase in nine months. The Midwest witnessed a similar trend, with rents climbing 4.9% to $1,441, marking the most significant rise in five months. Contrastingly, in the South and West, rent adjustments were minimal, with a 0.3% increase to $1,635 and a slight 0.1% decrease to $2,349, respectively.

Why It Matters: The uptick in mortgage rates observed in February dampened the spirits of potential homebuyers who had recently seen a beacon of hope as rates began to decrease.

“Mortgage rates ticked back up in February — a disappointing development for prospective homebuyers, who just a few months ago got a glimmer of hope as rates finally started to fall," noted Daryl Fairweather, Redfin’s chief economist. The persistently high rates have led many to opt for renting over buying, thus bolstering rental demand and subsequently, rental prices.

Shelter costs — which include owners' equivalent rent (OER), rent of primary residence (Rent) and smaller contributions from lodging away from home, tenants' and household insurance, and the rental equivalence for vacation homes and timeshares — carry a significant weight, comprising 36% of the Consumer Price Index (CPI) basket. This hefty component underscores the direct influence of housing costs on the broader inflationary landscape.

The Federal Reserve has made substantial headway in reducing inflation over the past 18 months. However, the last stretch towards achieving the 2% target warrants caution, especially given the current dynamics in the housing market.

While the Fed has made significant progress in lowering over the past 18 months, caution for the last mile reaching the 2% is warranted.

Stock reactions: Reflecting the rising rent conditions within the residential real estate sector, the iShares Residential and Multisector Real Estate ETF REZ experienced a 4.5% growth over the past month. Notable performers in this industry include UMH Properties, Inc. UMH, which saw an 11% increase, Independence Realty Trust, Inc. IRT, with a 9% uptick, and Camden Property Trust CPT, rising by 7% over the same period.

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