Are Rent Prices Going to Drop?
The US housing market including the house and apartment rental market were running strong with rent prices rising through the pandemic.
Now in June, we are seeing rent prices drop overall, yet not in all cities. As the economy begins to roll, these dropping prices won’t last.
In fact, Zumper and Rent Cafe offer up some contrasting stats below. It is difficult to understand what actually if going on in the rental markets. Finances, demographics, and work at home factors are creating a market in flux.
The reviving economy will be welcome news to landlords and property management companies who have seen their cash flow interrupted, increasing administration time, possible legal bills and evictions, and threats of rent controls.
Rents Did Fall Due to the Corona Virus
We asked previously, as our visitors were keenly interested in how rents would go. In fact, rent prices did drop for the first time in the wake of the Corona Virus.
“I’m seeing rents are down 10% to 20%, with higher-end and luxury units taking the biggest hits,” said Dave Chesnosky, an agent with Compass in San Francisco. “But these drops are dependent on the location and uniqueness of a unit.” — from CNN Report
The CARES Act is helping tenants pay their rents for now, if they decide to pay the rent. Those property management firms and landlords who use modern property management solutions are able to improve their financial management, while automating tasks and maintain more productive relations with tenants.
The Federal Aid programs helped to bridge the shutdown, but the deficit for renters is just too much. In California and New York where rent prices are the highest, these aid programs barely help at all. As in the story above, those with $2000 to $4000 a month rent payments are experiencing the most difficulty.
Landlords, see why ManageCasa might be your best solution to encourage rent payment from tenants. Tenants should advise their landlords to investigate the advantage of automated partial payments. It’s good for both.
Rent Cafe Reveals Rent Prices Rose in May
RentCafe reports a rise in rents, however the 2% increase is the lowest in over 10 years. The shutdown appears to be slowing rents only temporarily. Given businesses are only slowly opening and recovering, we can expect lower prices in June.
Rents increased in 79 percent of the nation’s biggest 250 cities in May, were unchanged in 17 percent of cities — from RentCafe rent report.
Zumper Reports Rents Are Down
Zumper reports that the national one-bedroom rent average dropped 0.2% last month to $1,217, while two-bedrooms remained at $1,473 per month. And on a year-to-date basis, both one and two bedroom rents are only down 0.5%.
Zumper’s new rent report shows rents fell or were flat in the top highest priced cities. And 4 of the top 5 metros all saw price drops.
Top Five Rental Markets
In San Francisco, CA one-bedroom rent dropped 2.6% to $3,360, its lowest in over 3 years, while two-bedrooms decreased 1.8% to $4,420. That is a 9% drop year over year.
In New York, NY one-bedroom rents stabilized at $2,950 per month, while two-bedrooms inched down 1.2% to $3,220 per month.
In Boston MA one-bedroom rent dropped 2% to $2,450, while two-bedrooms stayed flat at $2,900.
In San Jose, CA one-bedroom rent fell 1.6% last month to $2,420 per month, while two-bedrooms dropped 3% to $2,950.
And Oakland, CA actually saw both one and two-bedroom rents increasing a slight 0.4% to $2,350 and $2,850, respectively.
Renters appear to be looking for roomier apartments where they can live and work (work at home). The work at home trend is here to stay it seems, and this will affect one bedroom prices in many cities.
Major Cities See Price Drop
The big cities are getting hit hard due to unemployment and tenants leaving for less dense accommodations elsewhere.
Not All Cities are Seeing Falling Rents
Zumper reports some surprising rises in many US cities.
US Rental Housing Market
We’d like to review/critique the data from top sources including Zumper, to help buyers of investment rental property, landlords and property management companies better understand and manage their rental properties.
In some cities, demand is brisk, seen in charts below, and rent prices have jumped. With interest rates so low, and now lower, the investment environment for rental property is promising. The key factor in today’s rental housing markets and real estate markets, is a significant lack of housing.
With strong employment and rising wages, the risk for rental property owners is lower than normal. The key to the rental market is high demand and low supply leading to innovation such as build to rent homes. Migration and economic shifts mean there are new cities to buy investment property.
6 Big Rental Market Changers
However, the industry is experiencing changes due to: automation technology, investment choices, demographics, persistent housing supply issues, corporation investment funds, and new regulations.
Stats show that trends of recent are different from the 2000 to 2008 period as well as the 2010 to 2018 period. These trends affect investors choice of properties, new construction decisions, housing construction and availability, rent prices, and even determine whether rent controls and other harmful legislation is enacted.
Using this data, landlords and property managers can better identify their customers, where the market is now and where it’s going, what types of rental units to buy, and whether rental property will continue to be a good investment.
Enjoy our epic report on the US rental housing market. Please do share!
This Rental Housing report is divided into sections:
- What is the current State of the US Rental Market?
- What’s Really Causing the High Rents?
- Who owns rental properties today?
- What are the challenges for rental property owners?
- Which types of rental Properties should you buy?
- Are renters getting squeezed too hard?
- What are the rent prices across the US?
- Which cities have the highest rents and ROI?
- Housing construction forecast
- Forecast of Renter Population Growth
- 15 Drivers of the Rental Property Market
1. What is the Current State of the Rental Market?
The face of the American Rental markets has changed and continues to through 2020. If you’re still targeting, marketing to, and managing renters against old profiles, you might enjoy this new view of the US rental market.
The US renter market is not balanced. Estimates are that millions of apartments are needed up to 2030. Construction has fallen short. Occupancy rates are very high. Homelessness is common. The fact is, a commitment to housing supply continues to be missing.
The market is pressured by high rising rental rates, lack of affordable rental housing, disappearance of low income renters, and a migration of jobs and workers to other cities where new construction is growing. However, financing and interest rates are accessible, cutting the risk to investment.
Renting in the US is big money. According to Zillow, U.S. renters paid roughly $4.5 trillion in rent during the last decade, more than the 2018 GDP of Germany. They reported that in 2019 alone, U.S. renters paid $512 billion in rent. Renters in New York ($56.6 billion), Los Angeles ($39.2 billion) and San Francisco ($16.4 billion) paid the most in 2019.
“the homeownership peak in 2004 to 2018, the number of married couples with children that owned homes fell by 2.7 million, while the number renting rose by 680,000.” — from the AMERICA’S RENTAL HOUSING 2020 report by the Joint Center for Housing Studies of Harvard University.
2. What’s Really Causing the High Rents?
Today’s rental market has an unfulfilled demand from renters at lower rent prices. That segment is evaporating.
Affordable housing shortfalls have led to rising rent prices just as many renters are becoming employed again or are earning higher wages. It’s one part scarcity and one part demand from renters with more money, who can’t afford to buy a home or condo.
For landlords, this points to rent defaults and evictions. This is causing a boom in credit checking, tenant screening, and automated payment solutions, which would help landlords avoid cash flow problems and legal problems stemming from evictions.
3. Who Owns Rental Property?
Recently, according to a report from Harvard, discussed below, institutional investors have discovered value in the rental market too. They’ve been buying multifamily properties, houses and apartments, in huge numbers. And they are ready to manage them at scale. New technology, including property management software is making large scale management possible thus making rental property a profitable investment.
That report said the share of mid-sized apartment properties owned by individuals has dropped from nearly two-thirds in 2001 to about two-fifths in 2015. Older apartment buildings in particular with low rents, are attractive to institutional investors who like the profit potential of these after an upgrade. And they may be the only buyers with the cash to rehab the buildings which are often run down and costly to operate.
4. What are the Challenges for Rental Property Owners?
High rents and low costs are not a given. Markets change, and your renters may not be able to keep up with higher rents and young renters expect different services.
For landlords who resist change and technology, pressures and responsibilities are mounting.
Landlords biggest challenges is in daily property management including maintenance, bookkeeping, tenant management, and meeting their budget. Keeping up with advancements in technology is another challenge that pressures many. In fact, a trend to migrate from old software solutions to more modern platforms is under way.
Landlords must learn new ways of doing business.
Landlords are faced with these top challenges:
- earning a profit
- finding a good property management company
- finding a good online property management software
- meeting tenants demands for instant service, self-service, extra amenities, and online payments
- managing the expense and risk of modernizing old rental properties
- finding affordable prices
- managing irate tenants who can’t afford their rising rents
- late rent payments, rent defaults, and rising rate of evictions
- selling then buying better properties with sustainable ROI
- working long hours, handling too many tasks and getting them all completed
- meeting government regulations
5. Rental Property Types
There’s no shortage of rental property types. From student housing and seniors housing, to fix and rent single family, to beachfront vacation rentals, and from studio apartments to luxury condos.
According to Rentcafe, the most searched for apartments were 2 bedrooms (45%), 1 bedrooms (27%), 3 bedrooms (16%), and Studios (12%).
|Bedroom Type||Average Rent||Change M-o-M||Change Y-o-Y|
National Data Courtesy of Rentcafe.com
Latest US Rent Prices Courtesy of Zumper
The high year over year rent growth for 2 bedroom units occurred in New York, Newark, Washington DC, Milwaukee (14.7%),
6. How Much Are Rent Prices Today?
Around 2018/2019, rent prices were plateauing, But within the last year, rents have began to rise faster.
Renting a condo or apartment or house has increased in every age group. The Rental market was plateauing up to 2018, but 2019 has seen a revival with 350,000 new renters.
And last, but not lease is this recent report from Apartmentlist showing cities with very strong rent price increases. Keep in mind, that rent price growth is just on factor in assessing investment potential.
High income renters have increased by 545,000 through 2018. Those earning over $75,000 accounted for 75% of new renters (3.2 million) from 2010 to 2018. 157% more Americans earning more than $150K per year began renting this past decade (Rentcafe). In contrast renters earning less than $30,000 fell by nearly 1 million. This is the exact opposite of what happened in the 2000’s decade.
According to Harvard, the number of low-cost units renting for under $600 fell by 3.1 million and the supply of new units from $600 to $1000 fell by 450,000 units.
With respect to rental unit construction, new building has been brisk, however much of it is being built for higher income earners.
It would seem that due to the rising income of some has resulted in that group commanding the market, leaving little for other groups. High construction costs, high land costs, high materials and labor costs, also tells us that housing cannot be built for low income populations, at least profitably. Therefore, governments may be the only group capable of provisioning low income housing.
Reports show that vacancy rates are below 5% in most metros, and 45 of them were below 3% vacancy rates. They found only Houston, Oklahoma City and San Antonio had vacancy rates above 5%.
These are historic lows. While low vacancies and high rent are welcome situation for landlords and property management companies, for tax charging metros, it means higher costs to manage the homeless and the fallout related to a lack of housing.
This chart below show how occupancy rates are climbing and vacancy rates falling across all types of rentals. Harvard stated that rent prices of primary residence rose by 3.7% year over year in the third quarter of 2019, which far exceeds the 1.1 cost of living.
The record for consecutive quarterly growth in rents to 29 or more than 100 months straight! The showed that real rents rose 4 times faster in the 3rd quarter of 2019 than the prices of all other goods sold in the US.
7. Are Renters are Getting Squeezed Too Hard?
One controversial, my opinion, is that rental housing is not being created or marketed to low income earners. The lower income segment simply isn’t being served. It might be said however, that governments could free up land, provide tax relief, and assist developers in building appropriate low income housing solutions.
Such an effort may be well beyond the means of the private sector rental housing investment community in terms of cost and risk. Governments can if they choose, make it profitable for such housing to be built.
According to the Harvard report, 10.9 million renters spent more than half of their incomes on housing in 2018. In that year, the number of severely burdened households increased 155,000, reducing the total improvement since the 2014 peak to just 483,000. Cost burdened renters rsoe again in 2018, rising by 261,000 to 20.8 million.
They found that 72% of renters earning less than $15,000 annually were severely burdened, along with 43% who earned $15,000–29,999.
8. Should I Buy Rental Property as an Investment?
Rents keep rising in 92% of cities, however is rental property investment the place to be in 2019/2020?
From Florida to California to Hawaii, the rental market remains constrained. Although prices have flattened or fallen in many areas, the revenue potential for builders and property owners is positive.
The US rental property market is a growing chunk of the now estimated $127 Trillion global real estate market which accounts for 60% of all mainstream assets.
The rental property market is less than half of the $36+ Trillion US Real estate market, yet for small property investors it’s a fertile paradise.
9. Average Rents Inch Upward
The average rent inched up $3 per month to stand at $1469 per month. July’s increase in rent price is the slowest since last February. Some suggest the economy is slowing and it’s weighing down home prices and rent prices. Yet homes prices are doing well now too. Rents in larger metros rose much higher though — increasing $64/month vs 12 months ago.
It would appears there is so much latent demand in the US economy, that prices will be difficult to suppress. The question regarding the housing market is if there are sufficient homes available to be listed this fall. Without home listings, people will have to continue renting.
Manhattan, San Francisco and Washington DC come in with big rent prices while Chicago’s rents are moderate.
Miami rent prices, Phoenix rent prices and Las Vegas rent prices have grown 5% to 8% YoY. Rentcafe also reports that Honolulu rent prices had risen 30% YoY and 1% MoM. Los Angeles rent prices rose a startling $122 YoY while Denver rent prices actually fell slightly. Overall, the rental market is bullish as the economy improves.
From Florida to California to Hawaii, the rental market remains constrained. Although prices have flattened or fallen in many areas, the revenue potential for builders and property owners is positive.
The US rental property market is a growing chunk of the now estimated $127 Trillion global real estate market which accounts for 60% of all mainstream assets. The rental property market is less than half of the $36+ Trillion US Real estate market, yet for small property investors it’s a fertile paradise.
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10. USA Cities with the Highest Rents
Rents are rising, and in some cities, very high and still rising. Good opportunity or a risky bet?
11. US Housing Construction Forecast
The housing construction market is brisk and expected to continue rising. Single family detached and low rise condominiums are the most desired properties. The housing market needs 1.4 million new homes each year and this could increase due to immigration.
The broad consensus supports a coherent climb in most of housing’s key performance indicators through 2019, with total starts stepping up from 1.26 million in 2017, to 1.36 million in 2018, to 1.44 million in 2019—jumps of almost 8 percent and 6 percent, respectively. Single-family starts, most forecasts assert, represent about three out of four total housing starts during that period — from Trends in Real Estate 2018 report from Urban Land Institute.
A recent report from RentCafe suggests that multi-unit construction is up 60,000 more units in January.
Chart below shows the falling rental vacancy rate nationwide.
12. Renter Population Growth
Immigrants are a big component of rental demand and the US rental market is expected to focus more on immigrant buyers in the next 12 years.
13. Top Drivers of the Rental Property Market
These 15 factors may influence the rental housing market, priced drops, and which cities will be best to invest in.
- buyer market is young and unable to finance the purchase of a home
- not enough single detached homes available to buy
- risks in buying are high with high prices, rising mortgage rates and housing market uncertainty
- millennials are career minded and not necessarily willing to buy now
- bank of mom and dad may be running out of money
- home and condo prices too high to purchase
- buyers won’t buy due to mortgage finance restrictions and long term worries over a recession/market crash
- cost of living rising
- millennial preference for older urban neighborhoods with walkability
- rents rising too fast compared to cost of buying a home
- cap rates not sufficiently better than other investment options
- immigration into US is still strong
- retiring baby boomers having tough time places to move to
- more good condos and apartments available because regulations are decreasing and construction techniques are better
- The number and share of cost-burdened renters – those paying more than 30 percent of their income fell 2 per cent in 2017 — meaning renting is more affordable
If rental properties are even a quarter of the $36 Trillion US real estate market, we can say with confidence that it has major economic impact. The growth in rental apartment, rental condos, and home rentals is creating a lot of jobs including property managers, landlords, and the kind of passive income many investors need.
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The US property rental market is a wonderful opportunity to earn passive income or ramp up earnings with active property management. Make sure you are utilizing the best property management software to ease you workload and create efficiencies and create sustainable cash flow.
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More articles on the Property Rental Market: Apartments for Rent | Rent Prices USA | Rent Prices | Will Rent Prices Fall? | Property Management | Rental Market | Multifamily Rentals | Apartment Management | Landlord Software | Property Management Fees | Property Management Salaries | Online Rent Payment System | Property Management Marketing | Accounting for Property Managers | New Property Management Apps