US rents fall for 33rd straight month; supply surge eases pressure

The US rental market is experiencing a rare reprieve for tenants. According to May 13 data, rents have fallen for 33 straight months as the multifamily construction boom continues to flood the market with new units. The Northeast is showing the strongest construction momentumThe empirical fact that winners keep winning over the medium term., delivering record volumes of new apartments, while the West is lagging its historical build pace. This supply surge is finally eroding landlord pricing power, which had been a major driver of US inflationThe rate at which prices rise across an economy. in 2021-2024.

The rental decline has several implications for inflationThe rate at which prices rise across an economy., monetary policy, and equity valuations. First, it removes a key inflation headwind that has persistently surprised the Fed on the upside. Shelter costs, which account for roughly one-third of the CPI basket, have been sticky due to tight rental supply. As new units come online, the year-over-year rent growth comparisons will become increasingly favorable, adding disinflationary momentumThe empirical fact that winners keep winning over the medium term. to the CPI index. Second, the rental market's softness pressures real estate investment trusts (REITs) and apartment-focused landlords, which have benefited from pricing power but now face margin compression as occupancy tightens and concessions rise.

For the Fed, the rental slowdown reinforces the stagflationary thesis created by the Iran war. InflationThe rate at which prices rise across an economy. from energy is elevated, but housing inflation is rolling over, creating a mixed signal. If housing inflation continues to cool while energy remains elevated, the Fed faces a narrow path: raising rates aggressively would risk a recession that crushes housing and employment, while holding rates steady allows energy inflation to persist. This ambiguity is why markets are pricing in a later peak fed funds rateThe overnight rate at which U.S. banks lend reserves to each other. than previously expected, despite the recent energy shock.

The risk to this narrative is that new construction could slow if borrowing costs remain elevated, supply growth could plateau, and rents could re-accelerate. Additionally, if the Iran war eases and oil prices fall sharply, the overall inflationThe rate at which prices rise across an economy. dynamic shifts and the Fed could move toward cuts faster. Conversely, if job losses accelerate and demand collapses, rent declines could steepen, pulling down inflation faster and forcing the Fed to cut despite headline energy inflation.