Rents are cooling off, bolstering Fed's case for cutting interest rates (2024)

After years of soaring housing costs, renters may finally have something to celebrate.

Economists say the most recent Consumer Price Index (CPI) report signals that inflation in the rental market is easing, giving millions of Americans some financial relief. And with rents markedly slower to ease than other spending categories, the downshift highlights that the ferocious inflation that slammed households starting in 2022 is relenting in earnest.

"Rent was one of the key factors keeping inflation elevated," said Stephen Brown, an economist with investor advisory firm Capital Economics. "That's obviously quite a good sign that overall inflation is probably now heading back towards 2%."

The CPI measure of shelter inflation has fallen from a peak of 8.3% in early 2023 to 5.2% this month, according to the Bureau of Labor Statistics. Capital Economics expects that trend to continue, forecasting annualized rent growth to decline to slightly below 3% by the end of 2025.

What renters can expect

With inflation cooling, renters are unlikely to see any major hikes in rent – at least not for a while. Although rents could tick up or down slightly, they will essentially remain flat, economists said. This is largely due to an increase in housing supply, which makes it harder for landlords to boost rents much beyond market rates.

The pandemic laid bare the nation's severe housing shortage, leading to a huge building boom, especially in the South and the Sun Belt states. As a result, the supply of dwellings has surged, particularly in cities like Austin, Dallas, Miami, and Phoenix, said Thomas Ryan, another economist at Capital Economics.

It will take time to fill these units, experts told CBS MoneyWatch, especially given that some of the construction is still ongoing. "We have just a tremendous number of units that are in the pipeline that we know are coming but haven't been completed yet," said Chen Zhao, who leads the economics team at Redfin.

The upshot: Landlords will focus on getting people in the door before making any drastic changes to rent, Ryan said. Capital Economics projects that rent growth will increase to upwards of 3% by the end of 2025.

In the meantime, it's a renter's market. And depending on where they live, apartment hunters might have an easier time finding deal, Ryan said. "Not only can you look for a good deal online, if you actually speak to your landlord you can get a discount or a very good deal — better than what's advertised online."

Still, renters with existing leases can still expect to see increases when they renew, Brown said. But rent hikes will be more modest, and well short of the the 10% or even 20% jumps during the pandemic.

"Now the rent increases are going to be closer to kind of overall inflation, hopefully in the single digits," he said.

Another reason to cheer more affordable rent

A dip in housing costs would not only benefit inflation-weary Americans — it would also buttress the confidence of Federal Reserve officials as they edge closer to lowering interest rates for the first time since March 2020, just as the pandemic was shutting down the economy.

Redfin's Zhao said thelatest CPI data "helps to cement the case for a September rate cut." Shelter accounts for over one third of the CPI, making it the biggest component of inflation. So if shelter inflation is down, that is a good sign for the entire economy.

"The slowdown in shelter inflation will do a lot of the heavy lifting in terms of pulling inflation back down toward 2%," Brown added.

Capital Economics predicts the Fed will ratchet back its benchmark rate from the current level of 5.25% to 5.50% to between 3.5% and 3.75% by the end of next year. In the short term, the firm expects rate cuts in September and December, though Brown said there's a "reasonable chance" of an additional cut in November.

"That's our forecast, but the election result could obviously upend some of that, particularly when it comes to the end point in 2025," he said.

In:
• Interest Rates
• Rents
• Inflation
• Housing Crisis
• Federal Reserve Board