Over the past ten years, rents have increased by as much as $600 per month across the U.S. While an increase in rents is good for investors, it can create challenges for tenants who want to save for a downpayment or live in a better neighborhood. Why are rents rising so fast and will it level out? Here are seven reasons for rising rents and how they may affect your investment property’s cash flow.
Why Are Rents Rising So Fast? 7 Major Reasons
As of 2018, America became a “renter nation.” For the first time, more people started renting rather than owning a home. There are a variety of reasons for this, such as:
- High home prices and fees
- Increasing interest costs
- Lack of desire to avoid maintaining a property
According to Zillow’s Rental Market Report June 2024:
- The average rent in the U.S. is $2,054
- Since the pandemic, rents have increased by 32.8%
- Rents are 3.5% higher than last year
So, why are rents rising so fast? Let’s dive a little deeper.
Reason #1: Low Housing Inventory = Demand for Rental Properties
A balanced real estate market has an estimated six months of inventory and does not lean toward a buyer’s or seller’s market. During the pandemic, we saw a seller’s market with record inventory lows of 1.6 months. Reports currently show that we have around 4.2 months of housing supply.
Some real estate markets are showing signs of becoming more balanced. Cities like Tampa, Florida (90%), San Diego, California (80%), and Seattle, Washington (69%) are already seeing an increase in housing inventory.
While national listings have been increasing, the overall number of homes on the market is still well below historical levels. Low inventory at higher price points means many people can’t find homes in their price range. As a result, the demand for rental properties remains high, and rental vacancy rates remain low.
Reason #2- Median Home Values Went Up (Slightly)
Over the last several years, home values have experienced impressive gains. For example, before the pandemic, the median home price was $280,700. Three years later, it grew to $406,700.
Today, the increase is leveling out. According to Zillow’s Home Value Index and Real Estate Market Report, the median value of homes in the U.S. increased 2.7 percent last year. The average home value is $359,892, and the average median list price is $399,933.
As you can see by the numbers, all the talk in the news about a looming housing market correction didn’t happen. With housing values continuing to rise, the demand for rental housing continues.
Reason #3: Down Payments Aren’t Getting Any Cheaper Even with Mortgage Rate Drops
Putting aside current mortgage rates, the average down payment for a home is usually 20 percent of the purchase price. Considering the average home price in the U.S. is around $359,892, potential homebuyers are looking at a $72,000 down payment. That’s a lot of money for many people!
Even with the recent drop in interest rates, buyers still aren’t in a hurry to take the plunge. This is because lowering interest rates doesn’t impact the size of your down payment. Plus, the fees associated with buying a home remain high. At the same time, many potential homeowners are hesitant about making a big purchase, like a home, when there is a lot of economic and political certainty.
Reason #4- Occupancy Rates Remain High
A recent report by Moody’s, a well-known real estate data source, showed that occupancy rates are holding at a high rate. The average multi-family vacancy rate has held steady at around 5.5 percent. Vacancy rates only went up in 34 of 79 major cities across the country since last year.
Reason #5: Growing Demand from Millennials & Baby Boomers
Spending free time maintaining a home and a lawn may not be at the top of many millennials’ priorities. On the other hand, baby boomers entering retirement age may no longer be able or willing to maintain a large home or yard. For these demographics, renting is quite popular.
Many baby boomers decide to sell the large homes they’ve raised their family in and downsize to a rental apartment or condo. Many millennials choose to rent over buying a home. A lot of that has to do with how renting appeals to a millennial’s lifestyle.
Reason #6: Renting Offers More Flexibility
You give up some freedom when you buy a home. Many people, particularly millennials, place a lot of value on a flexible lifestyle. They’re just starting out and eager to see what’s in store for them as they enter “adulthood.”
Choosing to rent so you aren’t tied down to a home and mortgage payment offers a lot of flexibility and freedom to pursue unexpected opportunities with no strings holding you back. It makes sense that flexibility is such an appealing factor for many.
Reason #7: Renters Avoid Property Maintenance and Repairs
There are many benefits to renting. One is not having to fix or pay for issues like leaky water lines, broken appliances, and general repairs or maintenance. Knowing that a landlord is responsible for property-related maintenance and repairs allows renters to avoid many unexpected expenses, hassles and time spent.
Will Rents Continue To Rise? 3 Reasons Yes & 3 Reasons No
While rents have consistently increased over time, rents have increased by 30 percent since March 2020. While the pace seems to have slowed, rents are still expected to continue to rise. Nerdwallet shares the following annual increases:
- In 49 of 50 U.S. metros, rents are up from one year ago
- Cities like Hartford, Connecticut (7.5%), Cleveland, Ohio (7.2%), and Louisville, Kentucky (6.4%), have seen the highest annual increases.
- Multi-family rents rose by 2.5%
- Single family home rents rose by 4.3%
- In 44 of the 50 largest metros offered rent concessions
Here are three reasons rents may continue to rise and why rents may slow down.
3 Reasons Rents May Continue to Rise
- Low Rental Inventory Persists. More Americans are searching for apartments to rent, while not enough are being built.
- High Demand for Rental Properties (i.e. millennials)
- High Home Prices Continue to Create Affordability Issues
3 Reasons Rising Rents May Slow Down
- Rents Can’t Rise Faster Than Income Forever
- Rising Rents Will Slow When Building Costs Surpass Rental Rates
- Supply Will Catch Up With Demand
What Now?
This may be scary news if you’re a renter hoping to save enough to buy a home. The best advice we can give you is to rent a house owned by one of the millions of decent landlords. And do your best to be a respectful and considerate tenant. Landlords sometimes get a bad rap, but most aren’t bad people. They may raise your rent a little bit each year to make sure they have enough to pay for their rising costs and fees, but in doing so, they can ensure you have a properly maintained and nicely run place to live.
If you’re a landlord, rising rent is obviously a good thing. Higher rents mean more cash flow. Rising rent demand means lower vacancy rates, which also helps you make more cash flow. That said, not all areas are experiencing rising rents and lower vacancy rates. It still really matters where and when you buy your rental property. This is why it is SO important to always perform a market analysis in the area you’re looking to buy before purchasing a rental property.
