Why Are Rents Going Up?

According to CoreLogic, rents rose 9.3% in August versus a year ago. In addition, all major metropolitan housing markets covered by CoreLogic show positive rent growth. The largest increase is in Miami with a 21% increase. So why are rents going up?

Low Supply of Rental Units

  • There has been severe under-investment in housing construction for years in the United States. According to Freddie Mac, there was a supply shortage of 2.5 million units coming into the 2020 recession. The National Association of Realtors released a report in June highlighting the under-investment’s impact on home prices and rent increases.
  • Many tenants did not move during the pandemic. As a result, fewer units have been placed on the rental market.
  • The ability to work remotely and live anywhere is causing available rentals to be snapped-up quickly.
  • Property values are increasing, so landlords are choosing to sell their investment property when they become vacant. While some of these properties remain rentals, others are no longer available.

High Demand for Rental Units

  • For-sale inventory is low, so potential buyers keep renting and increasing the demand for rentals.
  • Tenants are moving to cities with lower costs of living resulting in greater demand for rentals in these areas.
  • The ability to work remotely and live anywhere is increasing demand for rentals across the country.
  • According to the Census Bureau’s monthly Current Population Survey (CPS), the share of the population age 18-29 living in their parents’ homes was 43% in October 2020. As these young adults move-out, they add to the growing demand for rental units.

Can The Problem Be Fixed?

While the situation is challenging, the rental market will adjust. The issue is not only increasing the supply of rental property, but also starter homes which are currently being bought by investors for rental property. Success is when there is enough property to meet everyone’s needs. As described below, progress is being made.

  • With the growth in rental rates, investors are rushing to build more rental properties. This includes not only construction of apartment complexes, but also build-to-rent single family homes.
  • Low interest rates are driving investment in rental property so investors can get a better return on their money.
  • Inflation is expected to rise, and most people view real estate and rentals as a bet against inflation.

As history shows, rising rents are nothing new. According to ipropertymanagement.com, rents have been increasing at a median rate of just over 4% annually for years. While the current increase is 9.3%, the rate will fall back over time to its historical average as the market adjusts to the high demand and low supply of rental property.

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