Rental Market Poised For New Highs Unless Mortgage Rates Drop

July 11, 2024
  • Manhattan median rents were the highest June on record despite sharp drop in size
  • Much smaller average size and stable median rent – tenants paid same but got less
  • June home sales pulled back as many gave up on Fed cuts, pressuring rental prices

Last summer, Manhattan rents surged to new highs, drifting lower during the fall until the Fed pivot in December. The expectation for 2024 was less disappointment. It was assumed that rents would drift lower as mortgage rates fell, spurred on by the eventual three rate cuts forecast by the Fed. Yet rents remained high in June, bidding wars set new records and prices are gaining ground on previous price records. June home sales were exceptionally weak so the already tight rental market has been additionally burdened with a slew of would-be additional homebuyers. They’ve been patiently waiting for mortgage rates to fall since early 2022.

Source: Bloomberg

Rent And Mortgage Rate Direction Are The Same

The unemployment rate has remained at 4% or less for thirty months. there has essentially been no inflation for the past two months so the Fed is facing political pressure to cut in September – despite me the lower rate of inflation, can they seriously consider rate cuts now when unemployment remains so low? I realize this is a very one-dimensional interpretation, but I’m trying to think like the Fed. If mortgage rates continue to slide, whether or not the Fed cuts, the rental market will slide too as excess rental demand will shift towards the purchase market. If the Fed cuts even a little, I think we’re looking at a mini-housing boom as 2.5 years of pent-up demand gets released. It’s something to think about when Manhattan rents for June are poised to exceed records set last summer, typically when rental prices peak each year. On a year over year basis, median rent stayed flat, tied for the highest June on record at $4,300 per month. The median rent is only $100 short of the all-time high set last August.

As The Rental World Churns, Bidding Wars Burn

The market share of Manhattan apartments renting for more than the landlord’s ask reached a record 24% in June.

Source: Miller Samuel/Douglas Elliman

A substantial amount of “churn” has defined the market’s dynamic over the past few months, Miller said. Renters are opting to move rather than accept price hikes their landlords are demanding, which in turn adds their apartments to the available inventory.

Bloomberg

National Rent Trends Are Ready To Rumble (Rise)

The typical interpretation of the U.S. rental market is stability or slight growth but poised for more aggressive gains this summer as would-be buyers hunkered down in the rent market, making a tight market tighter.

In Zillow’s just released June 2024 Rental Market Report rent growth is accelerating. Zillow’s “typical” rent was $2,054, up 3.5%, the fast rate of growth in eleven months.

The months long slowdown in the rental market appears to be leveling off as the busy summer season kicks off. Rents are growing at their fastest annual pace in nearly a year — though the margins are slim — and concessions offered by landlords and property managers have flattened after reaching a three-year high this spring.

Zillow

Rents rose nominally month over month in June. Manhattan rents are more than double the national number.

Getting Less For The Same

Even though Manhattan’s median rent was unchanged year over year at $4,300, it was the highest level for June since we began tracking this indicator in 2008. One interpretation would be that rent levels were unchanged. Yet the average size of a Manhattan rental in June was 900 square feet, down 15.1% year over year. In other words, median rent stayed the same but the square footage the tenant got for that was a lot less. This underlying fact is making the case that rents are poised to rise over the next couple of months during peak leasing season.

The Fed Is Living Rent-Free In Our Heads

Unless we see a Fed rate cut this fall, rents could potentially rise more after prices seasonally peak this summer. It’s been a long 2.5-year wait for would-be home buyers which is why I still anticipate an outsized reaction to the first rate cut.

Did you miss yesterday’s Housing Notes?

July 10, 2024

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