By Safiyah Riddle
(Reuters) – A surge in U.S. rental housing construction could drive down rental prices in coming months, a much-awaited step in the Federal Reserve’s efforts to rein in inflation, even as tighter credit conditions begin to dampen the apartment building boom.
Groundbreaking work for multi-family homes with more than five units — a size that typically indicates apartment construction — fell 11.6% to 482,000 in June from a revised 545,000 starts in May, the Commerce Department said Wednesday. Aggressive interest rate hikes by the U.S. central bank have made it more expensive to finance large-scale construction projects, and permits issued for new multi-family projects fell last month to their lowest level since late 2020.
Despite the slowdown, government data showed more buildings are already on the way: 977,000 more were already under construction last month, a new record. Meanwhile, 476,000 apartment buildings were also built in June, down from a three-decade high in February 2023, but still at an all-time high.
The apartment building boom — led regionally by the southern and western United States — is beginning to ease a rental housing shortage that has sent rental costs skyrocketing over the past two years and could finally put downward pressure on rental prices.
In fact, the gap between the number of multi-family units under construction and the number of single-family homes under construction is the largest in nearly 50 years.
For Fed policymakers, it may also be an important indication that their 500 basis point interest rate hikes could indeed cool the rental market, even if the monthly consumer price index (CPI) figures did not register the most recent trends.
“The current housing market is best described as the tale of two economies,” said Jeffrey Roach, chief economist at LPL Financial. “High borrowing costs weigh heavily on the first-time home buyer looking to move into a single-family home. However, construction activity in multi-family projects foreshadows the coming decline in rental prices as more units become available on the market.”
Rent prices climbed more than 8% on an annual basis in June, contributing 70% of the upward pressure on headline inflation, even as the decline in other goods and services pushed the CPI down to the lowest annual increase in more than two years at 3%, the Labor Department said in its CPI report last week. But more recent data supports the idea that inflationary pressure from rents may be easing.
Real estate company Zillow reported a 4.1% annual increase in rent prices for June, on par with historical averages before the coronavirus pandemic.
Meanwhile, real estate analytics firm CoStar Group reported a 10 basis point rise in the national apartment vacancy rate to 6.8% last month, pointing to an improving rental stock that could drive prices down if it continues to outpace demand for new leases.
“What we’re seeing in our rent data today is that rents will continue to put significant downward pressure on the CPI for at least the next two to three quarters,” said Jay Lybik, national director of multifamily research at CoStar.
Contrary to the drop in building figures in June, confidence in the rate-sensitive building sector continued to improve, indicating that the recent surge in construction could be sustained, despite relatively tight credit conditions and high mortgage rates. With most Fed officials backing just one or two more quarter-percentage-point rate hikes ahead of next week’s policy meeting, builder confidence is at the highest levels since June 2022, according to a Tuesday report from the National Association of Home Builders.
REGIONAL DIVIDE
The deceleration in rental prices is not uniform across the country.
Some cities in the Northeast and Midwest saw rent increases — a jump of 7% on an annual basis in Boston and 6.8% in Cincinnati in June, according to Zillow. Others in the South and West, however, saw year-over-year rental prices decline – Las Vegas and Austin, Texas saw them drop 1.8% and 0.8%, respectively.
Economists say this divergence can be attributed to differences in construction activity across the country. Indeed, the number of non-single-family home construction projects underway but not completed in the South and West combined hit a record 724,000, nearly three times the volume in the Northeast and Midwest.
“The markets where we’re seeing very weak rent growth are the markets that are building the most,” said Orphe Divounguy, senior economist at Zillow.
(Reporting by Safiyah Riddle; Editing by Paul Simao)