A surge in U.S. rental home construction could ease rent prices in the months ahead, providing a much-needed relief as the Federal Reserve continues its efforts to control inflation. However, tightening credit conditions are starting to slow down the apartment building boom.
Apartment Construction Slows Amid Rate Hikes
In June, groundbreaking on multifamily homes with more than five units – a common indicator for apartment construction – dropped by 11.6%, falling to 482,000 from a revised 545,000 starts in May, according to the Commerce Department. The slowdown comes as the Federal Reserve’s aggressive interest rate hikes have made financing large-scale construction projects more expensive. Additionally, permits for new multifamily projects decreased last month to their lowest level since late 2020.
Record Highs in Multifamily Units Under Construction
Despite this slowdown, the data also shows a large number of multifamily units still in the pipeline. A total of 977,000 units were under construction as of June, marking a new record high. Furthermore, 476,000 apartment buildings were completed during June, although this was down from a three-decade peak earlier in the year. The construction boom, particularly in the South and West regions of the U.S., is starting to alleviate the rental housing shortage that has caused rent prices to surge in the past two years.
Rental Housing Shortage and Price Relief
This increase in multifamily construction is expected to provide much-needed relief in the rental market. The gap between multifamily housing starts and single-family homes is the widest it has been in nearly 50 years, signaling a shift toward easing rental pressures. For the Federal Reserve, this trend could indicate that their rate hikes are starting to effectively cool the rental market, even if these trends haven’t fully appeared in the monthly Consumer Price Index (CPI) figures yet.
Economic Divergence in Housing
According to Jeffrey Roach, chief economist at LPL Financial, the housing market currently represents “a tale of two economies.” High borrowing costs are continuing to weigh heavily on first-time homebuyers looking for single-family homes. However, the rise in multifamily construction could foreshadow a decline in rent prices as more rental units become available.
Impact on Inflation
Rent prices, which increased by more than 8% year-over-year in June, were a major contributor to the overall inflation pressure. Despite this, recent data shows that inflationary pressure from rent might be easing, with a slowdown in rent price increases contributing to the broader decrease in the Consumer Price Index, which saw its smallest annual increase in more than two years, dropping to 3%.
As the housing market shifts, the ongoing apartment construction boom might finally provide a much-needed reprieve for renters and help further reduce inflationary pressures.