Rarely have I seen anything like the trajectory of rents nationally over the past year.
Of course, this only shows the change from year to year and not the rents themselves. Rents are still up year-over-year despite the dramatic about-face that happened around last March. That being said, we have reached an inflection point where rents have also started to decline month over month in nominal terms.
As real estate agent.com Remarks,
“In November 2022, the U.S. rental market grew in single digits for the fourth consecutive month after ten months of slowdown from January’s peak growth of 17.4%. Median rent growth in the top 50 metropolitan areas slowed to 3.4% year-over-year for 0-2 bedroom properties, the lowest growth rate in 19 months. The median asking rent was $1,712, down $22 from last month and $69 from the peak but that’s still $308 (21.9%) more than the same time in 2019 (pre-pandemic). (emphasis mine)
And if inflation is taken into account, the decline is even greater.
Moreover, the “builders’ strike”, as I call it, “could also delay home shopping plans and further increase rental demand.” The supply also bodes ill (or auspicious, depending on your perspective) for future rental prices,
“On the supply side, the number of rental properties could gradually increase as residential construction activity continues to pivot towards multi-family properties. This additional supply of multi-family housing could shift the market balance, increase the still-low rental vacancy rate and help temper recent rent growth driven by excess demand.
To show just how dramatic this change has been, compare the fastest growth in metro-level rents in the top ten cities over the past six months, 12 months, and since the start of the pandemic, according to data from ApartmentList. It goes from 37% growth since March 2020 (Tampa) to 7% in the last 12 months (Indianapolis) to 1% in the last six months (Indianapolis).
When the fastest growing metropolitan area is at 1% growth, that should tell you all you need to know.
For what it’s worth, the worst performing market over the past six months has been Providence, Rhode Island at -6%. Since March 2020, the worst has been San Francisco at -5%, but that’s mainly due to local factors. In fact, San Francisco is one of only two markets to have recorded negative rent growth since March 2020 and one of only five to have recorded positive rental growth of less than 10%.
That said, from November to December, rental prices have peaked. Medain’s annual rental growth for the top 50 conurbations is still slightly above 3%. It’s slower growth than we’ve seen in recent years, but growth nonetheless, and it shows that a much more ‘normal’ market is back.
Why have rents gone down anyway?
Part of that is just seasonality. Prices and rents tend to drop a bit in winter. But the overall plunge is much larger than normal seasonality would predict. There is much more to the story than that.
Before the Fed started raising interest rates, house prices were skyrocketing due to various factorsincluding historically low interest rates and severe nationwide housing shortage which stemmed from a decade of insufficient housing construction. This supply shortfall was then further exacerbated by Covid and lockdown-induced delays.
The housing shortage has had the same effect on the rental market as on the sale market. However, when rates rose, the “sellers’ strike” began and new listings dropped dramatically. Remember, unlike 2008, most homeowners today have 30-year fixed loans with low interest rates. There is little incentive to sell.
So one of the first tips I gave given that this new and very strange market was, “(I) if you own your home and need to move for work or other reasons, selling your home is not the way to go.” You should never sell or refinance a home with an interest rate of 3% or less.
“Instead, it makes more sense to rent your current home, then rent where you’re moving (assuming it doesn’t make sense or is unaffordable to buy there).”
Turns out a lot of people took that advice or had a similar thought. At the same time that new listings are down, we have noticed an increase in rental listings in all of the Kansas City metro submarkets in which we have properties, both for homes and the apartments. It seems to be like that all over the country.
Moreover, while rents on new registrations were increasing by more than 15% year over year, which was a far cry from the rent increase the average tenant had to pay. As NPR underline“Government consumer price data shows that the average rent Americans actually pay, and not just the change in the price of new listings, has increased 4.8% over the past year.”
The average increase on a lease renewal has not been close to the average increase on a new rental listing. So, unsurprisingly, many tenants (like landlords) don’t move.
With more properties coming onto the rental market, this increases competition and puts downward pressure on prices. At the same time, most tenants weren’t paying rent at market rates for new listings six months ago because their lease renewals weren’t keeping up with market increases. Thus, they have little incentive to move if they have to pay a significantly higher price to do so.
Several other trends have also contributed to this state of affairs. For one, many construction projects delayed by Covid have finally come online, adding additional supply to the market. In addition, inflation and rising house prices were approaching the limits of accessibility in mid-2022. This has hampered rental growth, including convincing more Americans to move in together.
As much as one in three adults rely on their parents for financial support, and many young adults, in particular, got into the habit of going back to live with their parents. More and more Americans are also open to renting a room or part of their house. A Realtor.com survey found that 51% of homeowners were willing to rent additional space in their home, a rate that is highest among Millennials (67%). Indeed, Americans living in shared accommodation are a growing trend for years.
All of these trends together are bringing rental prices back down to earth.
Is renting your property now a bad idea?
Like with the real estate market in general, the rental market is highly unlikely to collapse. After all, there is still a housing shortage and new construction is slowing again due to high rates (at least high by recent standards). Moreover, if the trend continues, rental prices are currently stable.
Also, many people who were looking to buy a home are giving up and are looking to rent. As their plans change, this will increase demand and put upward pressure on the market. And again, some of that recent dip is just due to seasonality, and as we enter the warmer months, the market should heat up again (pun intended maybe, I’m not quite sure), at least to some extent.
Skyrocketing rents over the past few years were an aberration, and having them come back down to earth may not be great for landlords, but it’s better for the country as a whole. While new purchases are made more difficult by the rise in interest rates, the rental market should stabilize.
Don’t expect rents to be much higher next year than they are now. But I wouldn’t worry too much about not being able to rent your properties.
New! Rental Market Updates – Top 100 US Markets
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Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.