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Rents Still Rising, Expected to Rise Another 16% Over 5 Years

Published by ezLandlordForms on

Apartment Complexes in DemandFive years later, the Great Recession's impact continues to restructure real estate markets and rental markets nationwide.

The homeownership rate has fallen precipitously in recent years, in the wake of the foreclosure crisis and credit crunch.  After reaching an all-time high of 69.2% in 2004, today it sits a more historically-normal 65.3%.  As painful as those crises were for many Americans, structurally the U.S. may be better off in the long-term with a more modest homeownership rate, according to recent research linking high homeownership rates with high unemployment rates

But that kind of drop in homeownership means millions of Americans are now renters rather than homeowners, feeding the demand for rental housing.  According to Zillow’s Rent Index, average U.S. rents have risen by 9.6% over the last three years, from $1,184 to $1,298.  Reis Inc reported that the apartment vacancy rate in the U.S. dropped to 4.2% in the third quarter, its lowest level since 2001.  Of the 79 metro areas they track, Reis reported that not one has seen rents fall in the last year, with average rents rising 3% year over year.

The foreclosure crisis of 2006-2011 is an obvious cause of the increased demand for rentals, but it is far from the only one.  Tightened credit markets have made it far harder for homebuyers to obtain a mortgage to purchase, particularly first-time homebuyers.  These have loosened slightly, but credit is not nearly as easy to obtain today as it was a decade ago.

Further, as credit has slowly and tentatively loosened, home prices have risen for the last two years.  This may have pushed homeownership out of reach for a worker who had been scraping by and paying off debts accrued in the Recession – just when she had cleaned up her finances and thought she might qualify for a mortgage, she may have found she could no longer afford to buy in her area.  According to Zillow’s Home Value Index, home prices have risen 10.1% in the last two years. 

A less publicized cause of the rental demand spike is the unbundling of households that joined during the Great Recession.  High unemployment and shrinking incomes during and following the Great Recession caused many Americans to unnaturally “bundle" and shared housing to save money.  For example, two young professionals who ordinarily would live alone may have moved into a shared apartment instead of each having their own, and young adults graduating high school and college who might otherwise move out on their own live at home longer.  Over the last three years, America has seen rents spike upward in part because this pent-up demand is now being released.  This unbundling effect will continue to unleash demand on rental markets nationwide over the next several years; consider that last year, no less than 45% of young adults 18-30 still lived with older family members.

Young adults such as these, who represent the much-discussed (and large) Millennial generation, are ripe for new household formation and feeding demand for rental housing.  Imagine a multi-step process, each causing demand for more housing: first, they move out from their parents’ house, into a three-bedroom townhouse with several friends.  Then, they each move into their own apartment – more demand.  Then they fall in love and marry, and upgrade into larger homes to make room for forthcoming children.

New Rental Housing Construction RisingSo what does the crystal ball say about future rent growth?

Economists with the National Association of Realtors project rents will rise by 4% in 2014, even faster than it has risen in the last year.  Reis Inc has asserted they believe rents will rise roughly 16% between 2012-2017.

On the supply side, developers had eased away from constructing multi-family rental buildlings in the early-mid 2000’s, because it was so much more lucrative to build condominiums and houses for immediate sale during the bubble, with prices inflated so high.  During the Recession and immediately after, there was a slump in building activity generally, as credit remained largely unavailable and few companies felt confident to start multi-year investment projects.  In recent years, new construction on rental properties has begun to increase, but it will be years before supply catches up with demand.

All of this is good news for landlords, many of whom are stuck with high mortgages from properties bought during the days of the bubble.  Rental properties remain a sound investing strategy, particularly in areas with greater demand for rental properties than home sales.

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