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Rents and home prices are still soaring, but at a slower pace

The cooldown coincides with an aggressive campaign by the Federal Reserve to bring inflation under control

A rental on the market in Houston this year. The average monthly payment for an apartment jumped 9.4 percent in the three-month period ended June 30, data show. That compares with more than 11 percent increases in the preceding two quarters. (Brandon Bell/Getty Images)

The red-hot U.S. housing market that has enriched property owners in recent years while squeezing renters and first-time home buyers is showing flickers of slowing down.

Though rents and home prices are still climbing, the pace is more subdued as inflation and rising mortgage rates weaken demand. In June, the average home price climbed 17.3 percent year over year, a significant pullback from the 19.3 percent increase recorded in May, according to the data analytics firm Black Knight. That two full percentage points is “the greatest single-month slowdown on record since at least the 1970s,” said Ben Graboske, Black Knight’s president of data and analytics.

Rents followed a similar trajectory in the second quarter, with the average monthly payment for an apartment rising 9.2 percent in the three-month period that ended June 30, year over year, according to the real estate data firm CoStar. That compares with back-to-back spikes above 11 percent in the preceding two quarters.

The shift comes as the broader economy has shrunk and sparked fears of a recession. Housing inventory has surged in parts of the country as would-be home buyers, priced out by soaring inflation, have pulled back, analysts and real estate professionals say.

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The recent moderation in rent growth “is directly tied to the lackluster demand that we have seen over the past 90 days,” said Jay Lybik, national director of multifamily analytics at CoStar.

Mortgage rates have been steadily climbing since the Federal Reserve began raising its benchmark interest rate in March to put a lid on runaway inflation. Consumers, in turn, are looking at larger monthly payments when they’re already paying more for staples like groceries and gas. It’s also more difficult to save for a down payment.

As a result, fewer people are seeking mortgages, with demand hitting a 22-year low in June as rising interest rates and recession fears hold off would-be buyers.

With landlords still increasing rent, and home loans becoming more expensive, many renters find themselves playing a game of inflationary whack-a-mole to maintain their standard of living.

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Josh Martin, a 25-year-old tech worker who lives in the north side of Chicago, wants to buy a condo in the $250,000 range because “rent is crazy right now, and I am scared that it’s going up.”

He currently pays around $1,000 for a studio apartment but says the price of a smaller unit in his apartment complex jumped to $1,300 on the website. The average rent for a one-bedroom in Lakeview, where he lives, is $1,700, a 22 percent increase from last year, according to the rental platform Zumper.

He faces a predicament: Is it better to buy a home in an overheated market when a recession might be around the corner, or stay put and run the risk of a big rent increase? These days, it’s hard to tell.

Martin was still renting as of Monday.

Others are trading down amid rising costs. Penn Johnson, 62, says he sold his house in affluent Fairfield County, Conn., last year and started renting. He owned a home there for 32 years before downsizing.

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“I figured I’d rent for a year and decide what I needed to do next,” Johnson said, not knowing that the volatile housing market would push mortgage rates up nearly 50 percent.

Now he doesn’t know what to do: While renting is comfortable enough, he didn’t want to do it forever. But at an age close to retirement, he didn’t want to pay thousands in monthly mortgage, either. Plus, the rent is hardly cheap: He is paying $4,200 a month for a place that probably used to go for $3,000.

“And I’m like, ‘Darn it, I’m stuck,’ ” he said. “I’m a pretty successful guy financially. I can afford stuff, but it’s hard to make sense of this.”

He’s among many Americans showing trepidation about what happens next. The consumer sentiment index, a widely followed measure of consumer attitudes maintained by the University of Michigan, is near a 50-year low.

For sellers, it marks the end of the “name your price” era. Johnson, who works in residential lending, said more sellers are accepting offers below their asking price.

“[Sellers] felt like they had a lot of market power, and I think that market power went away as the market became more balanced,” he said.

Because consumer spending accounts for two-thirds of the U.S. economy, policymakers have been closely watching for signs of contraction. So far, it has not slowed much: Spending climbed a healthy 1.1 percent in June, the Bureau of Economic Analysis reported Friday, up from the 0.2 percent recorded in May.

But that increase came during a month when gas prices were hovering near record highs — the national average breached $5 a gallon for the first time. And there are signs that some consumers are cycling down to cheaper options. Discount retailers like Dollar Tree report that they are gaining market share on their pricier competitors. Others, like Walmart and Target, are discounting excess inventory as they find consumers devoting more of their household budgets to food, fuel and services, some of them cutting back on shopping as a result.