- The housing market has been cooling across the US.
- That could drive an increasing number of Americans toward rentals.
- Economists expect rental prices to jump over the next year.
As the housing market cools across the US, economists say rental prices look poised to rise.
Falling construction activity and housing shortages across the country have priced an increasing number of potential buyers out of the market, driving Americans to rent instead. While lower mortgage rates could pull some in from the sidelines, new tax laws have reduced incentives for Americans to own homes.
Economists expect that to cause rental prices to increase within the next year or so, depending on how many apartments come onto the market and the pace of wage growth. Rental vacancy rates slid to a more than three-decade low in the fourth quarter, according to the Federal Reserve Bank of St. Louis.
“The flat trend in multi-family permits is a key part of our view that the rate of increase of CPI rents is set to rise this year,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, which is projecting a more than 4% year-over-year increase by 2020.
On Tuesday, the Commerce Department said apartment building rose in February but that the number of new permits fell from a month earlier. Housing starts fell nearly 9% last month, marking the largest drop in eight months.
Meeting a rising demand for apartments could be particularly difficult in coastal cities, according to First American’s chief economist, Mark Fleming, as younger renters move toward technology hubs.
“We’ve witnessed this dynamic play out in cities, especially coastal markets, where the tide of millennial demand has contributed to tight apartment inventories and increasing rental costs,” Fleming said.
With the unemployment rate at historic lows and signs of upward pressure on wages, the housing market has been a soft spot in an otherwise humming economy.
A growing disconnect between the two could muddle the outlook for consumers and further delay investment, according to Jonathan Miller, the chief executive of Miller Samuel, a real-estate and appraisal firm.
“Consumers are still looking to buy, but they’re waiting until they’re more comfortable,” he said. “People have a lot to process, and the sense of urgency to buy hasn’t been there in more than a year.”
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