Rents are finally cooling off in some of the most expensive cities in the US.
August marked the slowest annual growth rate for rents nationally in the last three years, according to data from RentCafé.
Manhattan saw a year-over-year decrease of 2%, while average rent in Brooklyn fell 1.3%.
In San Francisco, rents decreased 0.2% year-over-year – an otherwise unremarkable drop save for the fact that rents in the metro area have almost consistently been on the rise for several years.
“We’re attributing this to new inventory entering the market,” Zillow’s chief economist Svenja Gudell told Business Insider.
“In the last three to four years, we saw a lot more multifamily projects hitting the pipeline and in the last year and a half, we’ve seen significant increases in multifamily housing coming on line,” she said.
Indeed, apartment construction is at a 20-year high in the US, according to property intelligence company Yardi Matrix, keeping prices level, and even down in some markets.
At the same time, rent prices are increasing in cities where high volumes of renters are moving, said Gudell, such as Seattle, Los Angeles, Riverside, and San Diego, and mid-sized cities including Sacramento, Salt Lake City, Minneapolis, Portland, Louisville, and Atlanta.
“Expensive market rents have largely leveled off over the last year or so due to the fact that they’re not seeing as much in-migration – a lot of people are going toward San Francisco, but they’re also leaving San Francisco – so there’s reduced demand on the rental side,” Gudell said.
Rents in Seattle, an increasingly popular Western tech hub, saw 7.3% year-over-year gains. Sacramento, California’s capital city located Northwest of Silicon Valley, has seen an influx of tech workers in search of cheaper housing, causing rents to increase 8.2% year-over-year. Los Angeles experienced a 6.3% increase in rent prices.
That’s not to say rents aren’t still expensive in areas around San Francisco and New York. In fact, both cities, plus Boston, remain the priciest rental markets in the US.
But while increased apartment supply is a boon for some larger markets, a lack of single-family housing is still a problem nationwide. Coupled with slow wage growth, homeownership is no longer within reach for many Americans, especially millennials.
Though many millennials are taking longer to settle down than previous generations, for those who are ready to become homeowners, saving a down payment and securing a mortgage are two of the biggest hurdles they face, Gudell said. With rent prices leveling out in popular markets for millennials, and home prices hitting record highs, America’s homeownership rate could be in trouble.
“Homeownership is a wealth generating mechanism for a lot of Americans, like a piggy bank that you put money into every month,” Gudell said. Every mortgage payment a homeowner makes builds equity, like a forced savings tool, which isn’t the same for renters, she added. “That’s a potential lead to the wealth gap we’re seeing today, and can affect wealth building.”
“If you don’t have a house, that forced function of putting money toward your principal isn’t there, and that’s a potential lead to the wealth gap we’re seeing today and can affect wealth building.”