After months of declining rental prices, a worrying trend is emerging that could spell trouble for the nation's ongoing battle against high inflation. According to a new report from Realtor.com, the once-rapid progress in bringing down sky-high rents is stalling out, suggesting that stubbornly high overall inflation may be here to stay.
The report reveals that while rents declined for the 10th consecutive month in May, the pace of that decline has slowed significantly. The median asking rent in the U.S. was $1,732 last month, a mere $13 (or 0.7%) lower than the same period last year. Alarmingly, this figure is just $24 shy of the peak reached in August 2022, when the median rent hit a staggering $1,756.
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The stagnation in rental cost progress is particularly concerning because housing expenses have been a driving force behind the persistent inflation that has plagued the economy for over a year. As the report notes, "This deceleration trend could hinder further improvements in the overall rate of inflation and add long-term uncertainties, underscoring the consistent need for additional housing construction to alleviate the supply shortage that is contributing to higher costs."
High rental costs have a direct and acute impact on household budgets, especially for lower- and middle-income families. Census Bureau data shows that roughly 34% of households are renters, but this figure is even higher for those with incomes below the national median of $31,133 – over 52% of these households are renters. Households, on average, spend around 7% of their annual expenditures on rent, but for those without college degrees, that figure soars to nearly 10%.
The reasons behind the runaway rental prices are multifaceted. High demand from would-be homebuyers priced out of the housing market due to steep prices and mortgage rates has contributed to the surge. Additionally, low inventory and a pandemic-induced preference for more spacious living arrangements have exacerbated the problem. In fact, single-family home rents rose a staggering 14% in 2022, according to CoreLogic.
While some relief has been seen in certain parts of the country, notably in cities like Austin, Nashville, and San Antonio, where an influx of new housing supply has led to rent decreases of up to 9.3%, other areas are experiencing the opposite trend. Metros in the Midwest, such as Indianapolis, Milwaukee, and Minneapolis, saw rental price spikes in May, ranging from 2.9% to 4.4%.
As the Federal Reserve continues its aggressive efforts to tame inflation, the stagnation in rental cost progress presents a significant obstacle. With housing expenses accounting for a substantial portion of household budgets, particularly for lower-income families, sustained high rental prices could prolong the inflationary pressures that have weighed heavily on the economy for over a year.
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