Inflation in rent prices is putting many households at risk of falling into financial instability. Zillow Chief Economist Skylar Olsen breaks down where inflation and elevated mortgage rates are embedding themselves in rental and real estate markets respectively.
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Video Transcript
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JULIE HYMAN: If you're feeling the pinch of higher rent, you are not alone. While rents are finally showing signs of cooling, prices do still remain high. Typical rents for the month of May reached $2,048. That's up 4.8% from a year earlier according to Zillow.
And Skylar Olsen, Zillow's chief economist is joining us now. Skylar, we've talked a lot about home prices, purchase prices, but we got to talk about rents as well. Obviously, this is a big part of the economy for people who don't own homes. What's the outlook here for rental levels?
SKYLAR OLSEN: Yeah, well, when we're looking at the rental market right now, especially depending on where we're looking, you're balancing a few things. You know, we had a lot of migration over the course of the pandemic. A lot of reasons to move. That's probably starting to slow down.
We've also seen some areas that have delivered a lot of new apartments. Construction in the multifamily space was very hot and heavy over the course of the pandemic as well to kind of meet that need and meet that demand.
So now, where we're looking, you know, there are areas where rent continues to be soft and even is possibly falling on a month for month basis. But that is more and more rare as actually we start to see things in the rental market heat back up. It's softer than, say, a pre-pandemic month. But certainly much more pressure than, say, five months ago.
Now, when we're looking at that and we're trying to understand, you know, what is happening, there is a headwind to the rental market from the mortgage rates within for sale, as we just have a big buildup of people needing homes. This is a massive generation of millennials that are putting pressure on the market.
Just to put a number in your mind here, if I think about all the households that are living within, say, or excuse me, families, individuals, and couples that are living within other unrelated households, you're looking at 3.4 million. That's a lot of underbuilding. So the fact that we continue to see pressure come back on rental markets-- softer than pre-pandemic for sure-- but still rental price growth that's on par with a pretty steady growth.
BRAD SMITH: This is almost the second day in a row where I'm summoning Jimmy McMillan into the conversation because the rent is too high. At the end of the day, Skylar, when you think about what type of capacity needs to be brought online, what are some of the time markers that you would be looking at?
SKYLAR OLSEN: Yeah, in terms of time markers. So you mean like when we need these kinds of things? I mean, absolutely right now, there's an emergency for many people. If we think about like what it means at the household level, then let's again, let's-- I'm going to talk about the typical household. So for many households, this could be much worse, right?
Over the course of the pandemic, you might expect that rent would take 3% more out of your paycheck every month. Now, you're also dealing with general inflation at this time. So households are probably finding it increasingly difficult to save. That put them at financial instability, especially if you're expecting to go towards, say, a recession or you might be a bit more concerned about job loss moving forward.
So, you know, in terms of the needs for a break to American households, the time is most certainly now. In terms of timing, like, how long we might be in this crisis, we inherited it in the beginning of the pandemic. It was here. We were already talking about it. And then in terms of moving forward, you know, we might expect to see a lot of pressure on housing for the next decade when we talk about generational flows.
RACHELLE AKUFFO: And you note this less competition for rental units on the market as people do sort of tighten their belts, perhaps taking on a roommate, trying to do other things like that. So at what point do you see that also then affecting rental prices? Will they start going down then as more people start doing that?
SKYLAR OLSEN: Yeah, I mean, I think to, you know, what's happening right now in different rental markets, there's actually some unwinding probably going on as we start to see new supply. But a lot of that new supply was in places where we were seeing a lot of good growth, you know, inflow.
So when we think about what, you know, metros are receiving a lot of inbound population, those areas are often the places where rent is continuing to grow. And people continue to have to pursue strategies like that, right?
That $3.4 million number that I mentioned, by the way, that's-- or excuse me, not dollars. 3.4 million families or couples or individuals that are living within other households so, say, doubling up with a nonrelative, those are nonrelatives. There are plenty right now.
And we saw over the course of the pandemic, this surge of people that go back to live with family, of course. You know, so the boogeyman in every boomers basement is their, you know, millennial adult son, right, just kind of saving up to get financially stable. And potentially saving up to try and enter a for sale market that is also increasingly challenging, especially at the lower affordable end.
JULIE HYMAN: That is an amazing image, Skylar. I want to ask, how all of this feeds into the big picture and the Fed's inflation data that they track, right? Because we talk a lot about so-called owners equivalent rent as a proxy, right? But here is actual rents that we know what's going on with them. So it sounds like that this is not going to be something that helps inflation decelerate in the near term.
SKYLAR OLSEN: Well, you know, I think so I look at this every month as something I get very excited to refresh. This graph that I track that looks at that month over month pace within the shelter components of CPI, both, you know, for renters and owners' equivalent rent.
And I look at that month per month pace of our Zillow observed rent index, which as you mentioned, yes, tracks real asking rate rent. So does not include concessions. So we do other analysis on that to see there are absolutely places that are offering more concessions.
You know, but market rate rent, we did start to see those shelter components of CPI start falling and around a year lag after gory hit this fever pitch, you know, towards-- the fever was kind of towards the very beginning of 2022, end of 2021. Once that fever kind of broke on that rental market, 10 months later, you see those shelter components of the release market, which dominates the, you know, the CPI measures that are across the full housing stock.
So OK, what do I expect today if I look at those month over month shelter components. you know, we're about less than halfway back down to, say, a pre-pandemic pace in the release market. We are softer than pre-pandemic in those asking rate rents. So I think that's a good sign for the overall general inflation of the shelter component.
Pressure is easing. It's not going to be a source of incredible softness in general prices. But it is easing relative to those pandemic, you know, highs and heat. And that should help the release market continue to soften down, but maybe more slowly than we wanted.
BRAD SMITH: Really remarkable analysis. Skylar Olsen, Zillow Chief Economist there. I think we all hope that the rent prices come down. We will see in the near future. Yes, fingers crossed indeed.
