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Housing and Economic Insights Report – June/July 2022

Data Science team • July 19, 2022

We’re more than halfway through 2022 and compared to only a few months ago, renters are facing more uncertainty than ever. Our June/July insights report is breaking down the biggest market changes we’ve seen and what actions renters, owners, and operators can take to ride out the instability. 

 

A six-month shift in the U.S. economy

The beginning of the year started with a huge tailwind in the economy, including:

  • Large gains in employment (it was a candidate’s market)
  • High excess savings due to pandemic aid (like unemployment benefits and child tax credit payments) and reduced spending during the winter’s COVID restrictions 

Although much of this aid was soon to expire, the strength in the job market meant workers had the income to offset the loss in aid. This increase in cash-on-hand enabled consumers to spend at some of the highest levels since the pandemic began. Simultaneously, the average American was saving less with the personal savings rate plummeting to 5.2% in April, the lowest level since 2009.  

Soon after began the war in Ukraine and COVID supply-chain disruptions, causing a surge in consumer prices.

The January Consumer Price Index data reported an increase in inflation at an annual rate of 7.5% compared to a year prior. The high cost of essentials including food, energy, housing, and transportation caused this trend. By June, CPI inflation surged to 9.1% from a year earlier, with little signs that it would cool off throughout the summer. 

 

Source: US Bureau of Labor Statistics

 

The increase in consumer prices over the last year is now rising at the fastest rate since November 1981, driven primarily by big increases in gas prices. Although price increases are being seen across all goods and services, they are notably high for the essentials: gas, groceries, and rent:  

  • Grocery prices are up nearly 12.2% over the past year and 1.0% since May
  • Gas is up 59% over the last year and up 9.9% in June alone 
  • Rent is up 5.8% nationwide over the past year and 0.8% in June
Source: US Bureau of Labor Statistics, May 2021 to May 2022

 

While homeowners were mostly locked into low mortgage rates, renters are the ones feeling the pain of increased rent prices. Low-income consumers are also being forced to stretch inflation-crimped budgets and make tradeoffs on what essentials they can afford. Inflation is hardest on poorer households, who have the least flexibility to adjust their spending in response to high prices. The fears of continued inflation have started a new conversation as we enter the second half of the year: a potential recession.

 

What to expect as we fight inflation and a looming recession

In response to inflation, the Federal Reserve (“the Fed”) and its governing body have been taking action and setting the tone for the months to come. Many economists are skeptical that the Fed can cool down the economy without causing a recession, and the Fed hopes to help Americans make it through this period with as little turmoil as possible. Throughout the next year, we can expect to see: 

  1. Increased interest rates: The Federal Reserve has already raised short-term interest rates (which influence consumer and business borrowing) and signaled that it will continue to raise rates in the future. The rates rose by 75 basis points from a target of .875% to 1.625%, the largest rate increase since 1994. The Fed hopes that by making borrowing more expensive, consumer and business demand will cool down. All of this is meant to give the supply chain a chance to catch up and allow prices to moderate.
  2. A less optimistic economic outlook: The Federal Open Market Committee (the Fed’s monetary policymaking body) participants revised their forecasts for economic growth. They predict growth will be down and inflation and unemployment will continue to rise. They are signaling a much higher peak in short-term interest rates in the future, with forecasted highs near 3.4% by the end of 2022 and 3.8% at the end of 2023.
  3. Wage growth will likely slow: Although workers have seen an increase in wages this year, they are unable to keep up with inflation. The Atlanta Fed’s Wage Growth Tracker shows wages had increased 6.1% in May compared to a year earlier. Real wage growth, however, remains negative given inflation has been above 8% for several months. The Federal Reserve’s actions to slow the job market will likely mean slower wage growth in the future.
  4. Decrease in GDP with the potential for layoffs: The U.S. economy showed a decline in GDP in Q1 at a 1.4% annualized rate compared to the 6.9% annualized rate in the fourth quarter. The decrease was largely driven by supply chain disruptions as imports to the U.S. surged while exports fell. Fading government stimulus related to the pandemic also caused the downturn. Forecasts for Q2 GDP are being revised downwards, and layoffs are likely to broaden as credit-tightening takes effect. Atlanta Fed’s GDPNow, for example, is now forecasting 0% growth as of mid-June.
Source: Bureau of Economic Analysis

 

How owners and operators can face economic uncertainty head-on

Inflation and a general economic recession are going to hurt the lowest-earning Americans most, and chances are most of them are already feeling these impacts. If your residents remain able to pay their rent and afford essentials, you’ll reduce the likelihood of vacancies or evictions. With total eviction costs (including lost rent, vacancy, legal fees, repairs, turnover, leasing, and other costs) ranging between $2,500 and $8,000 per case, a key strategy for riding out the uncertainty in the economy is renter retention. 

While there isn’t much owners and operators can do to control the next phases of the U.S. economy, there are options for helping your residents stay in their homes. Rent reporting, for one, is a differentiated amenity that can lead to better financial stability for residents. Reporting residents’ on-time rent payments to the credit bureaus can ultimately help them establish or boost their credit scores, a main factor in building wealth in America.

Higher credit scores mean different things for different renters, but ultimately leave them with more money in their pockets:

  • For those with low or no credit scores: Establishing a healthy credit score for the first time unlocks “bank credit”, including access to credit cards and low-interest loans instead of “non-bank credit” like predatory payday loan lenders. As we explained in our March insights report,​ typical payday loans charge a fee of $10 to $30 for every $100 borrowed, equaling an annual percentage rate (APR) of 400%. In comparison, even the credit cards with the highest APRs of 30% are still a far better deal for the borrower.
  • For those with prime credit: Credit-building may not seem as valuable for market-rate renters with established credit scores, but a higher score can help them combat the costs that they’re fighting during inflationary times. On average, Esusu renters saw a 51-point score increase in 18 months, enough to bring a renter from sub-prime to prime, or even prime to super-prime. 

If you want to revisit the other housing and economic trends we’ve explored this year, check out our catalog of reports here. And of course, if you’re curious about what rent reporting can do for your properties or portfolio, reach out to us at sales@esusu.org