Understanding the Economy

If you own your own home, my sympathies—it’s tough to be you these days. Your house is probably worth 30-40% less than a few years ago. Your real estate taxes are likely going up, there’s a big ‘foreclosed’ sign on the house across the street, and you can’t sell your house even if you want to.

But suppose you are a tenant, part of one of those 35 million household who pay rent each month to landlords. Guess what? Good news for you–average rents in urban areas actually went down in July, for the first time in recent record (chart). That’s according to the Bureau of Labor Statistics, the government agency in charge of tracking all prices in the U.S.

Rent inflation, at annual rates

Now, the monthly decline was very small, only -0.03%. If rents continue to fall at the same rate for a year, that would total up to a -0.4% decline To put it another way, if you are paying $1000 a month for the crummy one-bedroom apartment, this decline means that you might end up paying $4 less each month…not much of a change.

But even small declines matter, especially since renters tend to be young, or poor, or both.. About 40% of renters are under the age of 35, for example, making every penny count.

Actually, the real surprise is how long it took for rents to start dropping. Home prices hit their peak in mid-2006 and since then have fallen more than 30%. By comparison, averager rents for tenants have increased roughly 10% over the same stretch. Part of the reason is that most apartment leases are signed for a year or more, which may include some increases already built into the agreement. These help push up the average rent.

But there are demand and supply factors which have also kept rents rising. When the housing bust hit, home mortgages became harder to get. Lenders tightened up, requiring bigger downpayments. And many people lost their homes because they couldn’t pay their mortgages.

As a result, quite a few people who would have wanted to buy homes were forced into the rental market. In effect, the demand curve for rental housing may have shifted to the right. This kept rents rising, and the number of renters going up. For example, over the past year, the number of renters rose by about 1 million, even as the number of homeowners fell (chart).

In addition, real estate developers have been mostly focused on building homes for sale, not for rent. Over the past year, there were roughly 960,000 new housing units completed, according to the Census Bureau. Out of those, about 520,000 were intended for sale, and only 440,000 intended for rent—not enough to keep up with all the new renters.

Now, eventually the market takes care of this imbalance. Renters start buying cheap houses. Owners of homes that they cannot sell start renting them instead. And builders start putting up apartment houses rather than giant one-family mansions.

How long and how far will rents drop? There’s no way to tell right now—but this is a darn good time to be a tenant.