We all know that home prices have risen rapidly over the past two years, but renting may not always be the more affordable solution as rents have also been skyrocketing. With rental spikes that have reached averages anywhere between 14-40% in many locations across the nation, many mobile employees are trying to figure out the dynamics of the U.S. rental market.
When comparing these numbers to previous years, it becomes obvious that the rental market has reached unprecedented circumstances across the nation, and especially within major urban areas. The Federal Reserve Bank of New York shared that there will be "a spike in rents in the near term, followed by more moderate growth in subsequent years." But what is driving this?
Our friends at CWS Corporate Housing have produced a paper entitled "Rising Rental Rates Explained" that taps several different resources to provide some deep-dive insights into the current state of the multi-family rental housing industry, what to expect moving forward, and how to apply this knowledge. They offer three driving factors behind rising rents:
- Low inventory: With the housing demand being significantly higher than the supply, individuals are turning to the rental market for a solution. This in turn causes the demand for apartments to soar as well. Coming off a decade of underbuilding, supply growth has been insufficient to meet the robust demand.
- Supply chain issues: Completing the building of new homes has been delayed by supply chain challenges. Houses not being completed on schedule has become another driving factor pushing people towards the rental market.
- Shifting demands: With remote and hybrid work has come a shift in what people want from their homes. Renters who would typically lease a 1-bedroom are now searching for 2- or 3- bedroom units to accommodate their work-from-home lifestyle. This shift has caused an increase in demand for 2- and 3-bedrooms while inventory on these remains low.
Then there is a fourth driving factor, which is that we expect to see rising mortgage rates prevent more would-be buyers from getting into an already expensive housing market where home values are expected to continue to rise, albeit not at the same pace as last year. Higher mortgage rates are simply shifting the robust housing demand from the ownership market back toward the rental market. In my colleague's recent post, Plus COO Joe Benevides shared that some buyers' average monthly payments would go up 39% year-over-year. It is still early days when it comes to 5%+ mortgage rates, so we will need to continue to watch over the summer to see if buyers are willing to pay such high mortgage payments. If they don't, these no-longer-in-the-market buyers become or remain renters — upping demand for rentals even further, in turn pushing rents up further.
Going back to The Federal Reserve Bank of New York and their recently released results from the 2022 SCE Housing Survey — which is part of the broader Survey of Consumer Expectations (SCE) — they shared that, "Owners, and especially renters, expressed a lower expectation of buying a home if they were to move over the next three years. Renters also reported a marked decline in their expectations of ever owning a home." 22% percent of households in the survey report they planned to buy a home but now view renting as a better financial decision. Most respondents either prefer to rent (36%) or said they were waiting for prices to come down before buying (42%). So the current reality is that the “rent versus buy” question is always a difficult one to answer, but may seem even trickier in the current climate as rent prices, mortgage rates and home prices all seem to be soaring.
Learn more about why rental rates have increased so drastically and what this means moving forward.