By Sam Wasson
Updated Nov 21, 2022
If you’ve looked at renting an apartment in the last six months, you’ve likely noticed the ever-increasing costs in the market. As of March 2022, the median national rent price hit $1,944, which is up 17% since the previous March, when rent was only $1,654. Since then, rent prices have increased to a whopping $2,002. But, interestingly, things have begun to stabilize, and as of September 2022, the month-over-month rent price is down 2.5%, with many experts predicting further drops.
When looking at the housing market since the onset of the pandemic, it’s clear that we’re living through an era of unprecedented change. Demographic shifts combined with remote work have resulted in swaths of people relocating to more scenic pastures. Supply line issues exacerbated our already strained housing shortage. And, to top everything off, we’re also experiencing record-high inflation, pricing countless Americans out of the housing market. Simply put, the rental market is volatile and radically different from anything we’ve seen in decades.
To help you make sense of these highly complex times, we created this article detailing the current state of the market, how it got here, and where it’s likely to go in the future.
Three words explain the current state of the rental market: expensive, volatile, and hopeful. We’re currently experiencing a highly competitive, shifting market resulting from a long-standing housing crisis exacerbated by the pandemic. As a result, most regions in the U.S. have seen tremendous price growth, creating a competitive seller’s market where landlords can sell at higher prices.
According to this Harvard University Joint Center for Housing Studies report, we can see that prices have continued to rise. In contrast, vacancies have dropped, and demand for rental properties has outpaced supply. However, there is a silver lining – more homes are being built, and, as a result, prices are slowly stabilizing. So, how did we get here?
As stated above, the cost of renting in the United States has increased across the board. Some locations are facing steeper competition than others, such as San Francisco and New York City, which have the highest home values and rental prices in the U.S. But, in general, metro areas, urban centers, and rural communities have all seen increases in rental and housing prices. Furthermore, year-over-year prices have risen across all levels of wealth and homeownership, from low-end studios to multi-family mansions becoming more expensive.
The main cause for this surge primarily stems from a rapid and intense demand increase. The cause of this comes from large amounts of potential buyers, or “households,” hitting the market all at once. Throughout the pandemic, multiple groups of people looking to relocate entered the market simultaneously. First, you had large amounts of millennials looking to buy their first homes, many of which were spurred in part by the financial aid from stimulus checks. As the demand for homes swelled, many looked to rent instead.
Then, a strange phenomenon occurred, a temporary consolidation of households. Many young adults, university students, and other groups quickly began to “roommate up” in single-family homes due to evictions and school closures. This home consolidation led to a market gap that would-be renters quickly filled. Then, as the effects of the pandemic waned, the consolidation ended, and many roommates moved out. These two groups then had to compete with everyone else looking to rent, resulting in an incredibly strained market.
While many people faced difficulties finding a home during the pandemic, America’s housing shortage goes back far further. The American Housing crisis results from numerous factors, including insufficient funding, a lack of affordable new housing, and poor policy planning. Most experts point their fingers at the economic climate of the Great Recession of 2009, as the number of new homes built during this time plummeted.
Housing production did not return to the pre-recession level until mid-2020; unfortunately, the need for new homes had far outpaced production by then. The pandemic only compounded these issues. As new renters hit the market, they were met with even slower housing production. The pandemic slowed down supply lines and created labor shortages, which grounded America’s already poor housing production to a screeching halt.
Today, while Americans still face a severe shortage of affordable housing, steps by the recent administration seek to begin remedying this crisis. The Biden-Harris administration released the Housing Action Plan to ease the burden of affordable housing and curb inflating rent. This plan is still in its infancy but will be rolled out over the next five years.
The coronavirus pandemic resulted in a dynamic shift in moving trends for many demographics. In particular, millennials and Gen Xers began to move away from major metropolitan areas like Washington D.C. and Boston. This transition has been called “the great reshuffling” or “the great migration” by moving and real estate experts. According to Realtor.com, in the first half of 2021, rural areas saw a population increase of 54.6%; this number represents the number of people coming in compared to the number leaving, meaning they gained more people than they lost by 4.6%.
The reasons for young adults fleeing vary, but the most commonly cited factors include being closer to family, access to healthcare, housing affordability, and rising inflation. Furthermore, the work from home revolution allowed anyone to work from anywhere. Now, homeowners and renters could relocate to the places they wanted to live and not those they needed to live. As a result, people began to move to locations with lower interest rates, cheaper rental units, and small but growing economies. When it came to out-of-state moves, many relocated to states along the Sun Belt or the Southeastern coastline, but for short-distance moves, most preferred to head for nearby suburbs.
When reading economists’ predictions for the future of the housing and rental market, the term “shifting sands” often comes up. This term, unfortunately, applies to our short-term market better than any other descriptor. The consensus is that the market is in potential flux, with many homeowners and landlords holding their breath and waiting to see what happens next.
Overall, things are cooling off, with rent prices dropping for the first time this year, as 61% of markets are seeing a rent decrease from August to September. New York has seen the largest drops in month-over-month rent, going down by 17%, with Illinois following behind with 4.6% and Massachusetts by 4.0%.
Unfortunately, month-over-month declines don’t indicate a major real estate shift or crash. Economists predict the market is in a state of temporary stasis and stabilization. Most anticipate a, at most, 5% drop in mortgage rates but, unfortunately, a rise in rent. According to a forecast analysis by The Federal Reserve Bank of Dallas, they estimate that the national Owner Equivalent Rent (OER) will increase from 5.5% to 7.7%, and a corresponding rent increase of 2.6% between June 2022 and May 2023. OER is the rent equivalent to the cost of homeownership; in other words, it’s a hypothetical amount homeowners would get if they rented out their home.
While home prices are beginning to cool down and return to pre-pandemic levels, the nation’s ever-rising inflation rates and the equally high demand for rental properties keep rents high. Simultaneously, some experts believe that the newly built homes in key metropolitan areas will help soften rent prices by the end of 2023. In the end, exact speculation is inconsistent, at best, at the moment. Most homeowners, landlords, renters, and would-be homebuyers are waiting until the market becomes clearer before making any definitive decisions.
It’s difficult to grasp the state of our current market, how it got to where it is, and possible future turns. Ultimately, the pandemic sparked the slowly building powder keg that was the U.S. housing crisis. Since the recession of the late 2000s, our country has been hemorrhaging for affordable housing. Combine the lack of available homes with supply line issues, new generations of households hitting the market, and skyrocketing inflation, and you have a recipe for burning hot rental prices.
The consensus we see from most experts is one that we agree with, and that is “wait and see.” As everyone and their property manager hold their breath while watching the current market, it is almost impossible to get a fair idea of how exactly things will shake up in the coming year. The unfolding fourth quarter of 2022 will give much-needed insights into the renting landscape of 2023.
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