Summary: In this article, you’ll learn why rents are rising so fast and whether or not it will stop soon. Hint: rising rents are being caused by a number of factors, including lack of affordable housing and an increased desire among millennials and baby boomers for flexibility. Both of these factors, and more, are contributing to a growing demand for rental properties today. Growing demand = higher rents. Read on to find out more.
Over the past ten years we’ve seen that rents have gone up as much as $600 per month across the U.S.
While some who rented 10 years ago have left the tenant world and gone on to become homeowners, many are still unable to afford a large enough down payment or even qualify for a mortgage.
As rents rise, people who can’t afford to buy homes may also find that they can no longer afford to rent in areas where they want to live either.
Why are rents rising so fast? Continue reading to learn the 7 major reasons and more.
Why Are Rents Rising So Fast? 7 Major Reasons for Rising Rents
In case you haven’t heard, America has become a “renter nation” as of 2018. For the first time ever, there is an increasing number of people renting rather than owning a home. There are a variety of reasons for this, including high home prices and fees, interest costs, or because they don’t want to maintain a property.
According to Zillow’s June real estate market report, average rent prices have continued to grow for the last 9 straight months. Apparently this has never happened before… which begs the question: why are rents rising so fast?
Reason #1: Low Housing Inventory = Demand for Rental Properties
Low housing inventory continues to be an issue. After finally seeing an increase in inventory at the end of 2018 and the beginning of 2019, the last four months show a drop in the number of homes for sale nationwide year over year.
Overall inventory has increased a little bit this year, but only for select types of real estate. The high end market still has plenty of inventory, but there’s still a huge shortage of property on the mid-priced to low-end price points. Low inventory at these price points means many people can’t find homes to buy 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)
Because home value trends affect the rental housing market, it’s important to note that new home sales has reached a 16-month high. The housing market has shown signs of slowing and leveling out lately. But that’s only compared to the impressive gains in home values we’ve experienced over the last several years.
According to Zillow’s Home Value Index and Real Estate Market Report, as of August 2019, the median value of homes in the U.S increased 5.2 percent in the last year, with average home values of $229,900. Historically, annual home values have appreciated on average at a rate of 3.8 percent, which make the last 12 months unique.
As you can see by the numbers, all the talk in the news about how the housing market slowing down isn’t necessarily true. The market isn’t booming, but it is still healthy and rising. And because of this the demand for rental housing continues to hold strong.
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 $230,000, potential homebuyers are looking at a $46,000 down payment. That’s a lot of money for many people!
After four mortgage rate hikes in 2018, the Federal Reserve suggested there would be another two rate increases this year. Instead, between November 2018 and June 2019, interest rates dropped from 5.09 percent to 4.09 percent.
Even with this drop in interest rates, buyer’s 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 home owners are hesitant about making a big purchase, like a home, when there isn’t a lot of economic and political certainty.
Reason #4- Occupancy Rates Remain High
A recent report by REIS, a well-known real estate data source, showed that occupancy rates are holding at a high rate. The average apartment vacancy rate held steady around 4.7 percent since Q1 of 2018. And vacancy rates only went up in 15 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 Millennial’s priority list. 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.
We are seeing Baby Boomers deciding to sell the homes they’ve raised their family in and downsize to a rental apartment or condo. And then we are seeing more millennials choosing 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 young, fresh-eyed and just starting out, 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 great 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 a lot of obvious benefits to renting. One of these is not having to fix or pay for plumbing issues, a leaky waterlines, broken appliances, and general repairs or maintenance. Knowing that a landlord is responsible for property-related maintenance and repairs allows renters to avoid a lot of unexpected expenses, hassle and time spent.
Will Rents Continue To Rise? 3 Reasons Yes & 3 Reasons No
Over the last 10 years, we’ve consistently seen an average rent increase year over year. Based on past trends alone, rising rents are expected to continue as a whole.
While the increase in 2020 has been slower than previous years, it has still gone up an average of $3 per month. As of July, the average cost of rent per month was $1,592 nationally. In larger metro areas, rents went up substantially, $64 per month on average. And rents rose in 92 percent of cities in the U.S.
Don’t forget, the average rent prices outpaced the for-sale market this year, for the first time ever. Here are three reasons rents may continue to rise and three reasons rents may slow down.
3 Reasons Rents May Continue to Rise
- Low Rental Inventory Is Persisting. More and 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 Should Catch Up With Demand
If you’re a renter hoping to save enough to buy a home, this may be scary news. The best advice we can give you is to rent a home owned by one of the millions and millions of decent landlords out there. And to do your best to be a respectful and considerate tenant. Landlords sometimes get a bad rap, but most of them 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’re able to make sure you have a properly maintained and nicely run place to live.
If you’re a landlord rising rents are obviously a good thing. Higher rents means more cash flow. Rising demand for rentals 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.