Higher rent prices unlikely to come down: Economist

Igor Popov, Apartment List Chief Economist, joins Yahoo Finance to discuss rising rent prices and outlook on regional demands.

Video transcript

- Turn your attention now to the housing market. And we've seen how prices surge-- could surge 16% by the end of next year. That's according to a report by Goldman Sachs. That's after a rise of about 20% this year. But inventory shortages and unaffordable prices have bled into the rental market. And here to help us discuss that is Igor Popov, Apartment List chief economist. Thank you so much for being here, sir.

And I've seen the rents go up myself because I rent in the city and moved just at the beginning of the year. So I've seen the prices skyrocket from January up to now. It's still a white hot market. The edge has been coming off a little bit, but we just got NAHB numbers out today, and building sentiment is still high. We expect to see sales go up. How does that gel with what you've seen in the rental market over the course of the pandemic and where we go from here because shelter inflation has skyrocketed?

IGOR POPOV: Absolutely. There have been a number of twists and turns, really, throughout the pandemic, but if we just look at 2021, you're absolutely right, we've seen that across the board. We've seen rents skyrocket 16.4% just since January alone in our data. And for a little bit of context, in a normal, more typical, pre-pandemic year, the average growth was only 3.4%.

So the market is already in a very different place than it was when you signed your lease at the start of the year. And the thing to note is that this isn't about a few hot markets, and it's not about demand shifting from one type of market to another. These are really rent rises across the board that are driven by strong, strong demand and limited supply, really across the entire United States.

- And certainly housing prices, they tend to move, I guess, slowly, but once they go up, they tend to stay up for a while. Is there any indication that these higher rent prices might be transient, to borrow a word from Fed chief Jay Powell?

IGOR POPOV: Right. I think it is unlikely that they will come down, but the-- at least the car will sort of probably press on the brakes a little bit because I think the rent will actually slow. It almost has to do, with how-- with the breakneck pace that the market has been headed. But we're really starting to head into slow season. It's important to remember that the apartment and rental markets are very cyclical. Most people move in the summer. That's when we see rents really climbing their fastest. And we usually see a bit of a cool down, especially as we get into the colder months, and especially in more seasonal markets.

The wild thing, though, right now is that, in a typical year, again, rents should fall in October, as landlords and properties are trying to fill those last few vacancies that they weren't able to fill in busy season. But we're seeing quite the opposite. We're seeing a slowdown from the summer, but that's not saying much, and not a lot of-- really not very reassuring to many renters, because we're still seeing about a 3.4 month-over-month growth in the cost of new leases throughout the United States.

So I think that, just to summarize, seasonal slowdown means something a little bit different this year. It doesn't mean rents falling like they typically do in October, November, December, but it means at least rent growth slowing down. So certainly, the price changes are there to stay, but the rate will cool from the breakneck pace it was on this summer.

- I don't think there is a seasonal slowdown this year, to tell you the truth, from what I'm seeing. But tell me, I know you say that, nationally, the prices are up across the board, but there are certain regions that have seen surges in prices, right, away from metropolitan areas. Can you tell us about some of those shifts? And do you think those regional shifts where people are moving to maybe for more space are a permanent, you know, thing that we'll see, or will people start to migrate back to more metropolitan areas?

IGOR POPOV: Well, it's interesting, what we saw in 2020, especially as the shelter in place era began and people kind of went into lockdown, was really a tale of two Americas when it came to the housing markets. We saw very, very fast declines in demand and, subsequently, rent in some of the hot, expensive, coastal job centers. You know, the San Franciscos, the New Yorks of the country. And we actually saw a surge in demand in a lot of smaller and more affordable markets that were growing, but saw a totally new era of rent growth, places like Boise, Fresno, Tampa, Florida, the Phoenix suburbs.

And so 2020 was about convergence, I think, where the expensive places got a bit cheaper and the affordable places started to really heat up. What we've seen in 2021 so far is essentially both of those types of markets growing quickly. So it's both true that the New Yorks and San Franciscos and Seattles of the country are rebounding quickly. In fact, just a couple of months ago, New York City led the nation in our data for month-over-month rent growth.

But what's happening in some of those smaller markets with a bit more room and a bit more affordability is that they're basically piling on a year of very fast rent growth on top of a 2020 that already brought a lot of rent growth. So places like, again, Boise, Spokane are leading our data, Tampa, Florida, in terms of the just immense rent growth that they've seen that traditionally would only be reserved for a small market where someone found oil or something like that. They've seen rent growth over 30% year over year.

So we are seeing flowback into cities. We are seeing kind of the expensive urban demand coming back. But I do think there is a real shift that's come from, you know, really a renegotiation of remote work that's happening throughout the country that's going to have a massive effect on the rental market, even as we go into 2022 and beyond.

- Igor, speaking of that demand coming back to major metropolitan cities, you know, during the depths of the pandemic, we saw landlords throwing everything plus the kitchen sink at would-be renters, you know, lots of benefits to-- and cheaper rent to entice them to come back. Have a lot of those incentives just dried up now, and rent prices are continuing to move higher in those big metropolitan areas?

IGOR POPOV: Yes, that's exactly right. Largely speaking, you may get lucky, but as a matter of principle, mostly the concessions are gone by this point. And the pandemic rent deals are mostly gone. We basically-- in our data, we have only five medium to big-sized cities that still have rents at a lower-- that are cheaper, basically, than they were at the start of the pandemic. That's San Francisco, Oakland, San Jose, DC, and Minneapolis. And even there, they're catching up, and still growing very quickly.

So the sweet spot, the luckiest renters in the country are those that signed their leases in January or December of last year in some of these markets that did see rent drops. But again, there's this whole other set-- in fact, most markets, they never actually saw those rent drops, even in 2020. But those premier coastal job centers, they saw both a quick drop and a quick recovery in 2021.

- I feel like I hit the jackpot because I signed my lease in February. So I was lucky--

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IGOR POPOV: There you go. Exactly.

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IGOR POPOV: Don't tell too many of your friends. A lot of envious people for that, at least right now.

- We will have to leave it there. Igor Popov, Apartment List chief economist, thank you so much for your time.