Rents are shooting up, and new data suggests they’ll keep climbing at an elevated pace in the years ahead.
The rally began in the housing market, where a buying frenzy dragged national inventory to historic lows and led prices to surge at their fastest rate in over 30 years. Not surprisingly it’s now spilling over into the rental market.
The median apartment rent in the US rose 9.2% through the first six months of 2021, this according to rental website Apartment List. That compares to the typical first-half growth of 2% to 3%. June alone saw the website’s national rental index leap 2.3%.
Whereas last year’s peak moving season was halted by the pandemic, this year’s seasonal spike appears to be making up for lost time.
Analysts expect rent prices to keep climbing for the foreseeable future, a major burden for renters and a warning sign that higher inflation could linger far longer than the White House and Federal Reserve keep predicting.
Why Rents Are Rising So Fast
Reason 1 – Increased Demand for Rental Properties
Rents are starting to surge in many parts of the country as the economy reopens and young people return rapidly to cities. On top of the influx of millennials and Gen Z renters coming back after staying with family or friends, people who can work from anywhere are still relocating to lower-cost cities, and the hot housing market has encouraged some baby boomers to sell their family homes and rent again now that their kids are grown.
Millennials alone are set to power unprecedented demand over the next three years throughout the housing market. That shift will drive an even bigger gap between supply and demand.
Reason 2 – Low Inventory
Housing construction has lagged demand in the years since the Great Recession, with single family home starts in particular declining in the last decade despite a continuously growing population.
The U.S. built on average 276,000 fewer homes per year between 2001 and 2020 compared to the period between 1968 and 2000, according to a report covered by the Wall Street Journal. Had building continued at the same pace, there would be 5.5 million more units of housing, the report estimated.
To make up the shortage, a report from the NAR suggests the U.S. would have to build 2.1 million homes each year for a decade—more than it built each year during the housing boom of the mid-2000s.
That shortage doesn’t just apply to single-family homes. In terms of multi-family housing units like apartments, a 2017 analysis by the National Multifamily Housing Council and National Apartment Association said to meet demand, at least 325,000 new units need to be built per year. “The annual average of newly delivered units over the past decade is a lesser 250,000 units,” reported HousingWire.
For years, the United States has not had enough rental properties. The problem is even more acute now as some building projects were put on hold during the pandemic and some rental homes were sold off this spring during the housing market boom.
It’s hard to keep up with demand shifts in the housing market because building homes is slow process and encumbered by a lot of things including developing land.
Reason 3 – Home Values Are Rising
According to Zillow’s Home Value Index and Real Estate Market Report, as of July 2021, the median value of homes in the U.S increased 15.0 percent in the last year, to an average value of $293,349. Historically, home values have appreciated at an average annual rate of 3.8 percent, which make the last 12 months unique.
Rents are closely correlated to home prices and thus as home prices continue to rise, so too should rents.
Tip : The rent-price ratio can be an indicator of valuation in the housing market, as well as a barometer for change.
When the gap between housing prices and rentals is high, it may be an indicator that the homes in the area are overpriced. This relationship between what renters are willing to pay versus how much homeowners are willing to spend may indicate that it’s a good market for sellers in the area – or that there is a housing bubble, and prices may make a sharp decline as the market corrects.
Rents tend to be a fundamental determinant of the value of housing in the area, and as such should not move too far out of line with home prices.
When there is a large gap between the two, expect to see a real estate correction of home prices to follow.
Reason 4 – Rising Mortgage Interest Rates
Forecasters expect mortgage interest rates to rise in the months and years ahead and chances are the record low rates seen this spring (below 3.0% for 30 year fixed rate mortgages) are gone for good. Rising mortgage interest rates impact the affordability of home ownership for many prospective buyers, in turn making it harder for sellers to stretch their asking prices. A 0.5% bump in rate increases one’s monthly payment by $28 per $100,000.
Rising interest rates directly impact the cost of borrowing and in turn a property owners monthly cost of ownership. How much a landlords can charge is impacted by what it would cost to purchase and finance a property. You see rising interest rates not only play a large role in one’s determination of how much house they can afford, but they also alter the basic buy or rent equation. As mortgage rates rise, so too will the monthly mortgage payment associated with owning a home thus allowing landlords to increase their rents.
Furthermore, as mortgage interest rates drive up the cost of borrowing more consumers will be priced out of the market and instead will turn to leasing further increasing demand for rentals.
Reason 5 – Institutional Investors
Wall Street is also starting to notice the high demand and low supply in the rental market and the potential profits that could be made. Private equity firm Blackstone recently purchased Home Partners of America, which manages about 17,000 rental homes, for $6 billion. And J.P. Morgan Asset Management and American Homes 4 Rent announced a deal last year to build more rental homes, targeting the West and Southeast.
Even though housing prices are rising, most homebuyers are interested now because they want to take advantage of the low interest-rate environment. Likewise, investors are keen on getting cheap money for assets that will go up in value.
In the first quarter of 2021, investors bought one of every seven U.S. homes purchased, which is a significant jump from the previous three quarters, when they were grabbing about one out of every 10 homes. Investors are the largest segment of buyers of multifamily properties, making up 25.8% of all purchases in the first quarter, according to a report by Redfin.
Lennar Homes—one of the largest homebuilders in the United States—recently announced it was purchasing more than $4 billion of new single-family homes and townhomes in high-growth areas in order to rent them out. This is a prime example of investors hedging against inflation while loan rates are low.
If an investor can lock in a low 30-year, fixed-rate loan, offset that with rising rents due to lack of housing supply and also enjoy the property value appreciation that has been roaring through the U.S., that investor would be well suited against rising inflation. Couple this with fintech—like Airbnb, Landing.com or Whyle.com,—making rental access ever easier for consumers and you could see a surge in this product.
Reason 6 – Inflation
Inflation is an average increase in the prices for a collection of goods and services in a given economy over a set period of time, usually calculated by year. Essentially, it’s the decrease in the purchasing power of the dollar over time. As inflation rises, the cost of everything goes up, including real estate.
Tip: If you can lock in a low-interest, fixed-rate mortgage, then the cost of your home—an appreciating asset—will stay the same as the value of your property rises.
Over the past 10 years the United States inflation rate has averaged 1.728 percent, however, the annual inflation rate for over the pst 12 months ended June 2021 is 5.4%, more than three times the average!
During high inflationary times, it can be difficult to get a mortgage. High-cost mortgage rates mean buyers have less purchasing power, so many continue to rent. This surge in demand results in increased rental rates, which is great for landlords and bad for tenants. And while appreciation is a distinct and separate market analysis, in general, housing prices tend to rise in an inflationary economy and we’ve of course already discussed how rising property values serve to drive up rents.
Tip : It’s important to note that inflation is not appreciation. An appreciation rate, as it relates to real estate, is the increase of a property’s value over time. With appreciation, value does not increase in relation to the currency, it increases based on demand. You can have scenarios where a home appreciates more than the inflation rate, and alternatively you can have it depreciate in an inflationary economy.
3 Ways a Home Purchase Is a Reliable Hedge Against Rising Rents
Typically, inflation ushers in higher prices for everything, including mortgage rates, home prices and rental costs. So, if you’re currently renting and looking to avoid rising rents and lock in your monthly housing expense, here are some ways buying a home now can help you later.
- Lock in a mortgage with a low, fixed rate. The average rate for a 30-year fixed mortgage is bouncing around the low-3% range, making this a great time to borrow money. As inflation increases, mortgage rates will likely climb, so folks who lock in a low rate now can avoid paying higher interest rates later.
- You won’t be exposed to rising rent. The rising inflation tide lifts all boats, including rent prices. Homeowners are shielded from mounting rental prices because their cost is fixed, regardless of what’s happening in the market.
- Property values increase over time. Tangible assets like real estate get more valuable over time, which makes buying a home a good way to spend your money during inflationary times.
Conclusion – Rising Rents Make Homeownership The More Affordable Option
Most renters put off buying a home because they think renting is more affordable than buying their own home. But with rents rising across the nation at historic rates, homeownership is becoming the more affordable option.
According to a recent Market Outlook Report from Realtor.com, in 2017 rents rose year-over-year in a whopping 78% of counties across the US. These sometimes drastic increases in rent are eating up more of renters’ budgets and often making renting more expensive than purchasing.
According to a recent study by Zillow, homeownership has become more affordable than renting in the majority of metro markets across the US. According to the study, the average renter pays nearly 30% of their income towards rent. The average homeowner pays significantly less, with only 15.4% of their income going towards their mortgage. In other words, in many markets, renting compromises nearly twice the income of owning a home.
If you’re renting as a way to save money, it’s time to rethink your strategy. Owning a home is a long-term investment strategy that can help you build your wealth. And with rising rents, it might be the more affordable option as well.
Rent inflation should continue in the months and years ahead. Shelter inflation is stickier than inflation in other categories, meaning it’s less likely to immediately cool after leaping higher.
If you’re looking to avoid rising rents, and are interested in exploring the option of Buying a Home in Columbus, Ohio please give us a call at 614.332.6984 and we’d be happy to assist you!
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