Return to Articles

Time was when you rented because you couldn’t afford to buy.  So you got a small apartment – or found a buddy or two to share a bigger place – watched your pennies and saved up for a home of your own. 

Now, one Great Recession and a housing crisis later, many people are finding it harder and harder to pay the rent.

Climbing Rents

Once an affordable option for those who hadn’t yet stepped on the path to home ownership, renting has outpaced both wages and housing prices.  In fact, according to Zillow’s January 2015 Real Estate Market Report, growth in rents should outpace growth in home values by the end of the year.  And the Zillow Rent Index shows that 72 percent of 859 cities in January 2015 showed increased rental prices from over a year ago.  In 56 percent of those areas, rents have increased on a monthly basis.

Those increases aren’t just found in historically high-rent areas such as San Francisco and Seattle.  The Zillow report indicates that cities like Charlotte and Nashville are experiencing higher-than-average appreciation in rent.  The report also cites a recent Zillow survey of economists and real estate experts indicating that rental prices should continue to increase over the next two years.

High rental prices are economically crippling to renters in two ways:  1) They make housing less affordable for those who must rent and 2) Because rent is increasingly taking a bigger chunk of take-home pay, it’s more difficult for renters to save up enough to make a down payment on a home.

Increasing Number of Renters

What’s behind the rising prices?  In short, demand.  Although the recent economic crisis has fed the demand for rentals, the number of renters has, in fact, been on the upward climb since before the collapse of the real estate market.  Since reaching a low in 2004 of 30.8 percent, the renter rate is now the highest it’s been in over 25 years at 36.3 percent. 

Foreclosures, unemployment and tighter lending practices all played a part in the increased demand.  However, the fact that Americans are more aware of the risks involved with homeownership is also fueling the trend.  Plummeting housing prices alerted current – and potential – homeowners to the fact that real estate was not a guaranteed fast-track to financial solvency.  Renting also allows for greater mobility if relocation is necessary to pursue an employment opportunity, and it frees up capital that may be needed to stay afloat in case of a job loss.  Recent studies even link a high homeownership rate with high unemployment rates, since homeownership restricts relocation to follow job availability.

Stagnant Wages

What’s making increasing rental prices harder to swallow is the fact that wages haven’t kept up.  Although there have been recent small gains in earnings (January 2015 saw a 0.5 percent monthly increase, the largest since 2008), wages have, according to the Economic Policy Institute, been basically stagnant since as far back as 1979.  Furthermore, the slowly strengthening economy hasn’t resulted in any real gains in wages for the majority of workers.

With wages remaining largely unchanged, the standard advice to spend about 30 percent of take-home pay on housing has become difficult, if not impossible, for many renters to follow.  A 2013 Harvard report found that fully half of US renters pay more than 30 percent of their household income on rent.

Even efforts to raise the minimum wage may simply translate to higher rents, since they expand demand without expanding housing supply.

Who’s Renting Now

If rents have changed, then so has the profile of the average renter.  The Joint Center for Housing Studies, tabulating information from the 2013 Current Population Survey, shares that, although four out of ten renters are age 35 and under, more than a third are between the ages of 35 and 54.

And as baby boomers age, if current rates continue, they will increase the number of renters over age 65 to 2.2 million by 2023, which would equal about half of the projected overall renter growth.

Families with children are almost as likely to rent as individuals are.  In fact, families with children represent a bigger chunk of total renters than they do total homeowners.  The takeaway?  Today’s renter isn’t necessarily the stereotypical single young adult.

One characteristic of the typical renter, however, remains true to the stereotype – renters overall are apt to have lower incomes.

The Bottom Line for Landlords

Of course high rental prices aren’t bad news for everyone.  For those with property to rent or looking to add a rental property to their real estate portfolio, the current rental market is a bonanza.

However, the savviest landlords will consider appealing to renters beyond young singles.  Although the Harvard report predicts that individuals will continue to make up a significant portion of renters, offering properties with features that appeal to families as well as to an aging population will stand landlords in good stead.

Families, for example, will be interested in renting homes within good school districts.  Older adults might prefer single-level living.  The diversity of renters means that landlords can earn a solid return on investment on many different types of properties, perhaps making them the biggest winners in the rental market battle.

Related Reading:

Rent Affordability: How Do Incomes Stack up to Rents, Since 2000?

The Changing Face of America’s Renters – and What It Means for Landlords

Leave a Reply

Notify of