Rates Rise and Rents Rise 

As recently as Q1 22, the Fed funds rate was close to zero. Since then, the Fed has raised short-term interest rates five times so far this year for a total of 300 basis points. And they do not seem to be anywhere close to done as Chairman Powell has committed to beating inflation back down to the 2% level. As the central bank raises interest rates to cool down the economy, this has also spiked home loan mortgage rates near 7%, further putting home ownership out of reach for many first-time homebuyers.

As a result, these potential buyers will now continue to rent, stoking further demand in an already hot rental market. Nationally, rents on new leases rose 14.1% during the first half of this year, according to Apartment List, a rental listing service. In 2021, rents rose an astounding 17.5%. The imbalance of rental demand and rental supply has been in play for quite some time as we have talked about in the past. Developers were expected to complete over 350,000 new units in 2022, according to the Joint Venture for Housing Studies at Harvard. With short-term borrowing costs increasing substantially, the ability for developers to finance new apartment construction will be impacted. This is in addition to supply chain disruptions and labor shortages which have plagued the industry.

Ironically, a Fed-sparked increase in rental demand makes it more difficult to tame inflation since rent costs typically make up about 30% of the Consumer Price Index. According to the August CPI report, shelter prices — which include rent, lodging away from home, and household insurance — rose 0.7 percent in August from the month before, the biggest monthly jump since 1991. The rent index by itself was up 6.7 percent from a year ago. Although a large number of new apartment units have been started since the pandemic began, it is hard to estimate how long it will take for that impending supply to impact the increasing demand.

Most economists predict that rents will continue to rise over the next several years, albeit at a lower, more sustainable pace in the 3-5% range. If the Fed is successful in slowing down the economy, this will invariably affect employment and wage growth. If they raise rates too high and too quickly and over-correct (which is the likely scenario) then we will see a prolonged recession where people will be forced to double up with roommates or move back home with family members putting downward pressure on rents. But this transition will take time to play out. In the interim, you will most likely continue to see rents increasing. 

About CALCAP

California Capital Real Estate Advisors, Inc., and its affiliate entities (CALCAP Asset Management, CALCAP Properties, CALCAP Lending, CALCAP Senior Healthcare, and CALCAP Strategic Opportunities, collectively known as “CALCAP”), is a California-based investment company founded and 2008 and headquartered in Pasadena, California. The Company sponsors alternative real estate investment opportunities focused on demographically driven housing. CALCAP has been able to consistently provide both individual and institutional investors with outstanding returns over the last 14 years. The Company uses a highly selective and disciplined investment approach, focused on delivering superior risk-adjusted returns. CALCAP currently has over $500mm in Assets Under Management. To learn more visit www.calcap.com.

Social Mission

CALCAP CARES is a 501(c)(3) private foundation organized to encourage employees to find a way to give back to the neighborhoods where we invest. CALCAP has created "GiveTime4Autism" as its initial program which gives employees the opportunity to donate unused vacation and sick days for a very worthy cause.