Rent Rose Just 2% in January. Here's Why

Rent is still unaffordable in some areas, but the worst may be behind us.

The days of skyrocketing rents may be behind us, at least for now. According to Redfin, rent prices rose 2% in January, representing the smallest increase in 20 months. In addition, the median rent price in the U.S. fell to $1,942, the lowest it's been in nearly a year.

Why rents are falling

There are two primary reasons rental prices are taking a tumble.

1. Demand has cooled

The reality is that rents are still too high. In fact, they remain 22.5% higher than in January 2020, before COVID-19 became a household phrase. That 22.5% increase has priced many households out of the market, and people who might have made a move this year are waiting until prices become more reasonable and they don't have to drain their bank accounts to keep a roof over their heads.

And for renters, it's not just sky-high rent prices. They're also dealing with inflation and economic uncertainty. Despite an excellent job market, U.S. workers don't trust that their employers will keep them on the job the next time there's a financial bump in the road.

There is little motivation on the part of renters to "move up" into an even more expensive rental.

2. Optimism on the building front

Business is returning to a semblance of normal for builders across the country, and those builders are feeling good about the future. According to the National Association of Home Builders/Wells Fargo Housing Market Index, homebuilder confidence in the market rose seven points to 42 in February. While 42 may not be a great number, it's still the most significant monthly jump in confidence since June 2013.

As the Federal Reserve becomes confident that interest rate hikes have helped cool inflation, it is likely to begin lowering those rates. While that's good news for anyone looking for a mortgage, it's also good news for builders.

As a bonus, dropping interest rates mean investors are in a better position to build the apartment complexes and rental homes that have been on the back burner. And the further we move from the initial stages of the pandemic, the more the supply chain opens up, bringing builders the supplies they need to build new communities.

In addition, according to Redfin, an increasing number of people are now opting to rent out their homes instead of selling, which further increases inventory.

Renters know that it's just a matter of time before prices fall and they have no interest in overpaying. The lack of market demand has helped put a lid on out-of-control pricing.

Not everyone is feeling it yet

If you live in Raleigh, North Carolina, Cleveland, Ohio, or Charlotte, North Carolina, you're keenly aware that rents remain unreasonably high. The factors at play in other parts of the country have not reached you yet. In fact, Raleigh experienced the most significant year-over-year rent increase, at 22.5%.

It's renters in cities like Phoenix, Arizona, Oklahoma City, Oklahoma, New Orleans, Louisiana, and Minneapolis, Minnesota who are currently benefiting from price drops. The hope is that it will make its way to other cities sooner rather than later.

In the meantime, it's good to know that brighter days may be ahead for millions of American renters -- and those days can't come soon enough.