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You may have heard that apartment rents in expensive cities like New York have fallen significantly during the COVID crisis. Earlier in the pandemic, there were some puzzling reports showing rising rents, though even their authors cautioned that was an artifact of incomplete data. But Zillow, the housing data website, says prices in the market are actually little changed: Apartment rents in New York in June were just one percent lower than they were a year ago, while in San Francisco they were down 0.5 percent; nationally, rents went up 1.5 percent. In this extremely unstable time, one of the things that has been surprisingly stable is the cost to rent a home.
How can that be? Joshua Clark, an economist at Zillow who works on the production of the Zillow Observed Rent Index (ZORI), points to extensive fiscal stimulus, including greatly enhanced unemployment insurance, which has bolstered household finances and made housing more affordable to more people than you might expect in a time of severe economic crisis. He also attributes stable rents to “price rigidity,” a phenomenon where market participants, including landlords, are often slow to cut prices in times of economic trouble, even if doing so would allow them to sell significantly more products or services.
ZORI works in a manner similar to the better-known Case-Shiller index of home prices: It compares the rents that landlords have offered over the years for the same exact units. If a unit is offered for $2,400 today and was offered for $2,000 five years ago, ZORI uses that fact to infer a 20 percent increase in rents over the last five years. Spread across millions of units, this approach makes it possible to measure month-to-month changes in the rental market, even though the typical apartment is offered for lease once a year or less.
Many landlords in New York have been offering increased concessions in recent months, such as one month free on a new lease, but Clark contends this is not a major problem for ZORI because such concessions are ordinarily accounted for in the advertised rents for listed apartments. For example, an apartment offered for a 13-month lease at $3,000 with one month free will generally be advertised by a landlord as having an effective rent of $2,769, not $3,000.
Some other rent indexes use the simpler, but less reliable, methodology of comparing the average rents for all homes that are available in any given month, and these indexes have often shown sharp recent swings in rents in New York and other major cities like San Francisco. The problem with this approach is that changes in the composition of available apartments can give you false signals about the change in prices for any given kind of apartment. For example, in a market where a lockdown has discouraged people from vacating their apartments, but newly constructed (and more expensive) units are still becoming available to rent, average asking rents may rise simply because the average unit on the market is now more luxurious than usual. Alternatively, an economic crisis that disproportionately causes low-income people to vacate their homes could push the average asking rent down, even if the rent for any given kind of apartment is unchanged.
There are also issues with the completeness and cleanliness of data that can make rent averages misleading. Unlike home sales, home rentals do not need to be recorded with property-tax authorities, and so there is no authoritative list of all rental contracts signed in any given jurisdiction. Databases of available rental listings will omit certain kinds of apartments, especially those owned by small landlords, and also may have duplicate inclusions of certain available apartments. Zillow asserts that its access to a wider set of apartment listings gives it an advantage over competitors here. It also weights apartments included in the ZORI so their characteristics match U.S. Census data on the housing stock so that, for example, if the apartments in Zillow’s database tend to be more recently constructed than Census data say they should be, the older units in the database are given extra weight.
It’s not that the pandemic has not affected the apartment market at all. First of all, apartment rents normally rise at a modest pace, so a one percent year-over-year drop means the market in New York is already somewhat soft. In addition to federal government support, many renters have benefited from an eviction moratorium that won’t last forever; to the extent that some people cannot afford to pay their rent, their units will eventually become available, which would tend to push supply up and market rents down. Evictions are also costly to the broader economy, and greater economic trouble also tends to push down rents.
And much of the federal fiscal support that has held up the housing market is scheduled to end soon. Most important, the CARES Act enhancement of unemployment benefits is set to expire at the end of this month. To the extent that Congress fails to adequately extend that support, both household finances and the broader economy will suffer, which will likely push market rents down. So if the economy gets a lot worse, it may become significantly cheaper to rent an apartment in New York. But that hasn’t happened yet.