There’s been much talk in the media recently about rising rents. While the headlines are familiar to some degree, the stories are increasingly layered over the speculation that price gouging is to blame. It’s an interesting theory and salacious enough to drive article views, but the fundamental reason rents are rising is much simpler—like as basic as Economics 101. So, I’ll say it again for the folks in the back: The U.S. does not have enough multifamily housing to meet demand.

How Do We Know? The Data Tell Us So.

Recent research from National Multifamily Housing Council and National Apartment Association shows that the U.S. needs to build 4.3 million apartment homes by 2035 to meet both future demand and address an existing shortfall of 600,000 units. That’s a tall order if history is any predictor of the future. The multifamily industry has only been able to keep new unit production on pace with demand annually seven times since 1989. This shortage has been chronic and compounding.

When you can’t produce enough new units to grow the supply in step with demand, you tend to also see vacancies go down. So, it’s unsurprising that record-low apartment vacancy rates (i.e., the number of empty and available apartments) coincided with the double-digit rent growth recorded from late 2021 into early 2022.

Put another way, when more people are looking for apartments than available units, prices go up.

It Works the Other Way, Too

More recent data show what can happen when the supply-demand relationship shifts. In contrast to what we saw at the beginning of 2022, in the latter part of the year, things changed as more economic uncertainty crept into the market.

These changing conditions caused apartment demand to slow. Some households doubled up, while others moved back in with parents or decided not to create new households at all. Subsequently, apartment vacancies increased because fewer households wanted to live in apartments.

This trend played out in multiple data sources. RealPage’s national vacancy rate for professionally managed apartments rose from 2.4% in the first quarter of 2022 to 4.1% in the third quarter. Similarly, CoStar reported a 30-basis point increase in the national apartment vacancy rate in the third quarter.

So, what’s happening now? Apartment owners began to offer lower rents to fill those vacant units. RealPage’s data show annual rent growth during this period moderated from 15.3% to 10.5%, while rents actually decreased for the past two consecutive months. CoStar’s data, on the other hand, show a 0.4% decrease in asking rents over the past quarter.

These changes illustrate how tight the relationship is among housing demand, supply, and pricing, as well as how sensitive they are to changing economic conditions.

But, But, But … Remember This

This recent moderation in demand and relief in pricing pressures is most likely temporary. The long-term outlook, however, expects apartment demand will rebound with improved economic confidence, which means we need to keep building new housing despite this temporary lull if we want to temper rent increases in the future.

However, to ensure that supply is built, we need to avoid the lure of “quick fixes” like eviction moratoriums and rent control. They do nothing to address the underlying supply shortage. More important, they eventually harm the very people they are trying to help by discouraging new housing construction and limiting the financial resources property owners have to maintain existing rental housing.We also have a very real affordability problem. Many households are struggling to find housing that fits their needs and means. n fact, 57.2% of apartment households are cost-burdened, spending more than 30% of their incomes on rent, according to the American Housing Survey. But we must acknowledge that our housing affordability challenges long predate COVID, even as the market disruptions created by the pandemic worsened them.

Fortunately, Economics 101 and lessons learned from the pandemic provide us a guide to solving these problems. First, we need to build more housing to meet housing demand (the economics lesson), and, second, we need to provide rental subsidies and other emergency funding sources to help keep at-risk, lower-income households housed (the COVID emergency rental assistance lesson).