Since 2020, the rental market has been on a roller coaster ride, characterized by abrupt swings.
That ride continued in 2022, but the year also brought with it a slow return to normalcy in the market, as rent growth cooled and inventory opened back up.
And for the past several months now, apartment rents have been dipping, a modest sign of relief for renters who have been squeezed by both skyrocketing housing costs and non-housing inflation, according to new data from Apartment List.
“Looking ahead to 2023, there’s still significant uncertainty about what the economy has in store, but there’s good reason to believe that renters will have more bargaining power than they have in years,” the firm’s analysis noted.
Among key trends those analysts expect for 2023:
- Rent growth comes back to earth: 2021 shattered the record for the fastest growth in the history of Apartment List’s national rent index (which goes back to 2017). The median rent nationwide increased by a staggering 17.6 percent, from $1,099 in January to $1,293 in December.
“While the market remained hot heading into the start of this year, such extreme levels of rent growth were not sustainable,” analysts noted. “In the first six months of 2022, rents increased by 5.5 percent nationally, a growth rate that represented a notable slowdown from the 2021 pace, but remained well ahead of the pre-pandemic norm.
In the back half of this year, rent growth cooled even further, and apartment prices have now actually been falling since August. It’s typical to see a dip in rents in the fall and winter, when fewer renters are looking to move, but it appears the recent decline is reflecting more than just seasonality.
“From August to November, our national rent index had the sharpest three-month decline in its history,” analysts said. “Year-end rent growth for 2022 will likely come in below 4 percent; this is close to the moderate level of growth we saw in 2018 and less than one-quarter of last year’s growth. 2022 marked the end of a prolonged period of astronomical rent growth.”
- More options for renters: The slowdown in rent growth described above is being driven by shifts on both the supply and demand sides of the market. On the supply side, this shows up as an increasing number of units available to rent, as reflected in our rental vacancy index. This index represents the number of vacant units listed for rent in any given month on Apartment List as a share of the total number of units in those properties.
“Over the course of 2021, our vacancy index declined sharply as more renters were competing for fewer units, bottoming out at 4.1 percent last October,” analysts said. “But over the course of 2022, this index has been steadily ticking back up, meaning that more supply has been coming available. In recent months, the rate of supply easing has picked up steam.
For renters looking to move, this means they should now see more options and less competition than at the outset of this year.”
- Lack of household formation drives cooling demand: On the demand side of the rental market equation, 2022 saw a major slowdown in the number of new households looking for a place to live.
In the early months of the pandemic in 2020, there was a sharp contraction in the number of households, as many younger Americans and those experiencing unemployment gave up their leases and moved in with family or friends to save on housing costs as they waited out the pandemic. But by late 2020, most of these households had re-formed, and that was followed by a surge in new households in 2021, as Gen Z struck out on their own and roommate households broke apart to find their own places.
In just a year and a half, the number of households in the U.S. increased by more than 5 million, from a pandemic low of 127.7 million, to a peak of 132.7 million in November 2021.
However, in 2022, new household formation has been relatively flat.
“It appears that renters are exhibiting much more caution in striking out on their own, as higher housing costs and general inflation have eroded their budgets, and as fears of a potential 2023 recession loom large in the public’s economic sentiment,” analysts noted.
- Home Hot Areas Will Cool and Vice Versa: As with similar 2023 forecasts on the home-sales front, the Apartment List estimations suggest the Midwest will be a hot spot over the coming year, with rents picking up accordingly, while some areas in the Sun Belt that had seen astronomical growth will be unable to maintain that momentum.
“We’re seeing signs of demand heating up in a number of Midwestern markets. The St. Louis, Indianapolis, Kansas City, and Cincinnati metros all rank among the top 10 for fastest rent growth in 2022,” Apartment List analysts said. “They have all shifted from having below-average rent growth in 2021 to above-average rent growth in 2022. After the spike in Sun Belt rents, the Midwest may now be the nation’s last bastion of rental affordability, and seems to be drawing interest from price-conscious and geographically flexible renters.