Sticky Inflation
By: J. David Chapman/February 2, 2023
Sticky inflation happens when prices jump on expenses that experience pricing changes in cycles of 4.3 months or more. Residential rent is a good example of sticky inflation, and these rising rents were part of what prompted the Fed to start increasing interest rates. Rental costs went up by 23.5% between October 2019 and October 2022.
The reason that real estate rent is a good example of sticky inflation is primarily because of the leasing cycle. This means it takes longer for rent to decrease once it goes up due to the inability to adjust pricing because of lease contracts. It takes time to increase rents when you purchase a building, but it also takes consumers longer before they can renegotiate rents if they have fallen. In property management, we call this the difference between contract rent and market rent. We can say that a lease has economic value (to the tenant) when the contract rent (amount tenant is paying) is lower than market rent (amount comparative properties are renting).
There are indications that we’re seeing a decreased rate of price hikes for renters in recent months, but that doesn’t necessarily translate to rent decreases. Many organizations, including the Fed, thought the recession, prompted by increased interest rates, would lead to decreased rents. Interestingly, recessions don’t necessarily mean rent prices will go down. In fact, during the 2008 recession, we actually saw rental rates increase.
If you are a real estate investor, you probably did not expect a perpetual rally in rent prices. The slowing of the increase should have been anticipated. The pandemic caused serious disruption in rental markets, both residential and commercial. We experienced business closures that prevented renters from paying property owners, imposed eviction moratoriums against landlords, and caused mass migrations that accompanied remote work opportunities. The world simply looks very different than it did prior to February of 2020.
I expect to see a stabilization of residential rent prices. Rents aren’t likely to decrease because higher interest rates are keeping many from purchasing and choosing to lease. They are not likely to continue to increase much either because builders have been focusing on building multifamily properties, thereby increasing housing supply. For renters willing to live in apartments, rather than single-family homes, inventory is increasing supply to meet demand.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).