Home prices have skyrocketed in recent years, locking many out of the housing market. With the prospect of buying a home more daunting than ever, many Americans are choosing to rent rather than buy. Yet rent prices have also increased steadily over the past few years, making housing affordability an issue that impacts renters twofold.
If you’re an investor looking to grow your rental properties or a curious landlord who wants to better understand the rental market, we’ll walk you through some of the most common problems plaguing renters and where the market’s headed so you can make smart money moves now.
1. Inflation brought rent prices to all time highs
Rent prices shot up in the immediate aftermath of the pandemic and remained elevated because of high inflation the U.S. has experienced since early 2022.
Although rent prices have outpaced inflation over the past 40 years, both increased at relatively comparable rates until 2001, when rent price growth started to exceed inflation. By 2021, rent outpaced inflation by 40% — the largest gap over the past four decades.
Increasing rent prices remain one of the largest contributors to inflation since housing costs make up a large part of the Consumer Price Index, the most well-known indicator of inflation.
The good news is there are signs rent prices may be cooling. Rent prices jumped 17% from 2020 to 2021 but just 7% from 2021 to 2022. Although prices are growing at a slower pace, they are still up 7% from the previous year’s staggering highs.
With inflation still high, renters are not only paying more for rent, they’re also paying more for everyday essentials, such as groceries and gas. This extra spending can make affording high rent even more difficult, particularly because wages haven’t kept up with inflation.
As a landlord, it’s important to be aware of financial difficulties many renters face. Ensure your rental prices are fair. It can help you attract and keep good tenants.
2. Rental units are in high demand, but inventory is low
Buying a home is more expensive than it was prior to the pandemic, so many Americans are choosing to continue renting rather than buy a home. However, the U.S. is facing a shortage of approximately 600,000 rental units and has yet to catch up to the high demand for rentals.
This shortage drives up rent prices. In areas with extremely high demand, a lack of affordable units may make it difficult for individual renters and families to find living spaces that will fit their needs. As a result, they may opt to share smaller homes or apartments.
With more renters than available units, landlords and property owners stand to make a hefty profit. However, to keep and attract good tenants, it’s important to price rent fairly. Otherwise, you could experience more late payments, high turnover, and vacancies.
3. Income isn’t keeping up with the high cost of rent
Wages aren’t keeping up with rising rent rates, making housing affordability a major issue for many tenants. A recent real estate study found that income growth has lagged behind rent growth by 7% since 1985.
When adjusted for inflation, income has grown only 18% in the past 10 years. That’s only 2% per year. By contrast, in June 2022, inflation had increased 9.1% from the previous year.
Since 2009, wage growth has outpaced rent growth in only four metropolitan areas: Providence, Rhode Island; Buffalo, New York; Cleveland; and Pittsburgh. This anomaly is largely attributed to slow population growth in these cities, tempering demand for rental housing.
With inflation outpacing income, that can make it even more difficult for tenants to afford steep rent prices, especially if they have debt. As an investor, you’ll also have higher costs because of inflation. It may be necessary to raise your rent prices, but those who are looking for long-term renters should ensure price hikes are reasonable.
4. Rent increases are even worse in cities
More than 80% of Americans live in urban areas, where rent hikes have hit consumers the hardest. From 2009 to 2021, seven major U.S. cities experienced rent increases of more than 60%. The cities include:
- San Jose, CA (85% increase)
- Denver, CO (82% increase)
- Seattle, WA (81% increase)
- Portland, OR (72% increase)
- San Francisco, CA (71% increase)
- Nashville, TN (62% increase)
- Austin, TX (60% increase)
Renters looking for more affordable places to live might consider migrating from cities to rural or suburban areas, but there are various obstacles that might prevent them from moving. First, jobs are more prevalent in metropolitan areas, as is public transportation to get to and from work.
Furthermore, because rental inventory remains low, it can be even harder to find a place to rent outside of cities. Rental property investors who are open to expanding their portfolio outside their city of residence have an opportunity to meet this need.
Consider building or purchasing rental properties in underserved areas with high housing demand to add another revenue stream to your business. If you don’t live nearby, you may need to hire a real estate agent to help you understand the local market and find properties that will attract renters.
Hiring a local property manager or property management software to help with day-to-day operations could also be beneficial. If it’s too difficult to manage a property remotely, you can always sell the property quickly to a company that buys houses for cash.
What does this mean for property investors?
Rent price growth has slowed since hitting a high of 16.2% in February 2022. In July 2023, rent only grew 0.5% month over month, a sign that rent prices are starting to cool.
Inflation is also slowing, although the Federal Reserve may raise interest rates one or two more times before the year is through. Rate hikes tend to be smaller now than they were in 2022 and early 2023, but there may still be a way to go before Americans see real relief.
For now, outlooks indicate that rent prices will remain high for the foreseeable future. If you’re an investor or a landlord, take advantage of this, but keep rent prices reasonable to help you maintain good tenants. If you’re able, consider offering lower monthly rates to tenants who apply for long-term leases for two or three years.
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