Demand for apartments in the United States crashed this summer, with asking rents dipping in September and the number of renters moving out of apartments exceeding the number moving in during the third quarter.
The surprisingly sharp drop in rental demand comes as home sales continue to weaken, suggesting that inflation and economic uncertainty are causing more Americans to put major housing decisions on hold, according to a recent report by real estate software and data firm RealPage.
The net change in the total number of apartment units leased was -82,095 from July through September, marking the first third-quarter period of negative apartment demand in at least 30 years, the report found. Typically, more people relocate during the summer months, leading to an elevated number of move-outs and move-ins, but move-ins appear to have slumped this summer.
Effective asking rents also eased by 0.2 percent in September compared to August, the first monthly decline since December 2020—although it’s normal for September to see a modest fall in rents. Median apartment rents in the United States topped $2,000 a month for the first time ever in May, rising 15 percent year-over-year, according to Redfin.
Lofty rents are probably contributing to softening demand for apartments, but lack of affordability doesn’t seem to be the main issue, according to RealPage. New lease signers tend to be financially healthy, with rising earnings keeping the average rent-to-income ratio just above 23 percent.
Demand also weakened for apartments at all price points and in almost all markets of the United States, which suggests that affordability concerns aren’t the main driver. Low consumer confidence likely plays a bigger role, RealPage argues, citing the impact of economic uncertainty on household formation. When consumers are worried about the state of the economy, they’re less likely to sign a new lease or buy a home.
Slowdown in Home Sales
Rising mortgage rates and a flagging economy continue to cut into home sales, turning down the temperature of the overheated housing market. Sales of existing homes (as opposed to new homes) fell for the seventh consecutive month in August, declining 0.4 percent from July on a seasonally adjusted annual basis, according to the National Association of Realtors (NAR). Existing home sales in August were down 17.4 percent year-over-year.
A house’s real estate for sale sign is seen in front of a home in Arlington, Va., on Nov. 19, 2020. Saul Loeb/AFP via Getty Images
The slowdown in sales is beginning to dent home prices, but not enough to offset the housing market’s massive surge since 2020. The median sales price for single-family homes was $396,300 in August, falling for the second month in a row after cresting at $420,900 in June. Despite the drop, prices in August were still 32 percent higher than in 2020.
Pricey houses and climbing mortgage rates are driving many would-be homebuyers to keep renting instead. Redfin data shows that average monthly mortgages surpassed rents in April, making apartment living a rational choice for more Americans. As of June, the monthly mortgage for single-family homes averaged $2,316, more than the average rental rate of $2,016.
Despite the recent dip in apartment demand, the market is still healthy, with apartment vacancy at just 4.4 percent, according to the RealPage report. Net apartment demand in 2021 reached an all-time high of more than 663,000 units nationwide, buoyed by remote work policies and young adults seeking their own abodes.
Average rental rates are still up 27.1 percent and 23.4 percent for one-bedroom and two-bedroom apartments, respectively, compared to August of last year, according to Rent.com. Smaller cities like Greensboro, North Carolina, Little Rock, Arkansas, and Richmond, Virginia, saw some of the highest rent increases year-over-year. New York City also witnessed a 26.7 percent jump.
That said, the peak in prices appears to have passed, granting some relief to cash-strapped renters in increasingly unaffordable cities. Nationwide rents decreased more than 2 percent month-over-month in August, Rent.com data shows. Major cities such as Los Angeles, St. Louis, and Jacksonville, Florida, saw significant year-over-year declines in average rents.
New Rental Units
The fourth quarter is usually the slowest for leasing activity, so a further easing of apartment demand could be on the way. Apartment construction is also soaring in the United States, which should help alleviate rent pressure when new units hit the market.
RentCafe projects that 420,000 new rental units will be completed nationwide in 2022, the greatest amount since 1972, as the construction industry recovers from COVID-era labor and material shortages. Houston, Austin, Seattle, Miami, and Washington had the largest number of completed apartments in the first half of 2022.
The New York metropolitan area is expected to deliver more than 28,000 apartments in 2022, surpassing Dallas to rank first in the country. The Big Apple’s building boom comes as the city struggles to retain workers and residents. New York City’s population shrank by 3.5 percent during the year through July 1, 2021, according to the U.S. Census Bureau.
Greg Isaacson
Author
Greg Isaacson spent 7 years in China and Thailand researching and reporting on business and real estate in Asia, with a focus on commercial real estate in Chinese-speaking markets as well as outbound investment from China. He has also worked as a real estate research analyst in Chicago and a real estate reporter in New York.
