Why US rental rates will continue upwards in 2023

Why US rental rates will continue upwards in 2023

US rental rates have been on a steady upward curve since the beginning of the pandemic. By September, the trend appeared to buck slightly, with the first drop in price since November 2021. However, the underlying tendency points to more growth for the rest of this year and well into 2023. As a result, buy-to-let investment in the US continues to offer exceptional potential. 

US rental rates drop marginally in September 

According to data from Realtor.com, the median rent in the 50 largest cities in the US dropped in September. The average US$10 decrease in monthly rates was the first fall in almost a year. 

While the figure brought good news to would-be tenants, the overall picture indicates a continuation of steady price rises. “My expectation is that rent price growth will likely remain elevated well into 2023,” said Danielle Hale, Chief Economist at Realtor.com. 

Predictions for rent growth in 2023

Other analysts back this expectation. For example, the Federal Reserve Bank of Dallas forecasts that US rental rates will increase by 8.4% in the year to May 2023. This figure is 2.6% higher than the 12 months to June 2022, when rents went up by 5.8%. 

Predictions from Moody’s Analytics reveal a similar trend and expect 7% rental growth in the year to next May. “Before the pandemic, annualised rent price gains were about 4 to 5%,” said Thomas LaSalvia, Director of Economic Research at the company. 

For their part, analysts who participated in a Zillow survey on forecasts for next year believe that rents will grow by 5.4% during 2023. The increase is considerably below the 8.6% uptick in 2022 but ahead of the pre-pandemic average. 

Reasons behind the increases 

Property market experts attribute the expected rental rises in 2023 to two main reasons: the rising costs of homeownership and a chronic shortage of housing supply. 

More expensive homes 

House prices have soared over the last two years in the US, with double-digit upticks commonplace in many metros. In addition, mortgage rates have almost doubled in the first nine months of this year.

As a result, would-be home buyers cannot afford to enter the market, leaving renting as their only viable option. This, in turn, puts additional pressure on the rental market. 

Lack of supply 

Rock-bottom inventory levels have characterised the US property market for the last two and a half years. Consequently, supplies in many areas is well below the 6-month level considered to be balanced. 

Florida real estate is one such example; in August, the Sunshine State had an inventory supply of fewer than three months. Single-family homes had 2.4 months available, while for condo properties, it was 2.2 months. Both are considerably higher than in 2021 but remain below a healthy six months. 

Expectations for beyond 2023

Further down the line, analysts expect US rental rates to start to cool their upward trajectory. Moody’s believes that the tapering off will begin in the second half of 2023. However, this prediction depends on a parallel taper in mortgage interest rates. 

LaSalvia thinks mortgage rates will stay relatively high for the next six months. “There’s an anticipation that interest still has to rise in the next six months for the Fed to get inflation back into its comfort zone,” he said to CNBC

Meanwhile, however, would-be tenants will continue to face rising monthly rentals and buy-to-let investors to benefit from pent-up demand. 

(Source: CNBC)