Get Ready for a Major Rent Hike

This is a reprint from MONEY TALK NEWS

October 25, 2013
By Marilyn Lewis

Rents rose 7.6 percent nationally in the last five years, The Wall Street Journal says. In some cities they’re up 10 percent.

Apartment rents (that’s the average rent, excluding perks and freebies) are expected to rise about 16 percent — from $1,049 in 2012 to roughly $1,215 by the end of 2017, Reis Inc. analyst Michael Steinberg tells Money Talks News.

Voracious demand

Blame it on the recovery, which is in itself is a good thing, of course. It means, however, that more people are in the market for rentals. At the same time, builders are struggling to bring new apartments online fast enough to meet the increased demand.

“The country has been on a decades-long drought of large-apartment-building construction” because, until recent years, homeownership was growing, writes Slate economic writer Matthew Yglesias.

Investors have been buying up foreclosed homes and renting them out, but even that’s not enough to satisfy the demand for rentals.

“Finding an apartment to rent got even harder in the third quarter, as the U.S. apartment vacancy rate fell to its lowest level in more than a decade,” says Reuters, citing statistics from Reis Inc., a provider of commercial real estate data and services.
More renters in the market

Here’s why the population of renters is growing:

·         Foreclosures. The share of Americans who rent a home is at a record high, in large part because of the millions of foreclosures that followed the real estate crash. Since 2006, the first year the U.S. saw more than a million foreclosures, an estimated 21.57 million homes have been foreclosed on, according to this chart at StatisticBrain.

·         Recovery. By 2012, 45 percent of 18- to 30-year-olds were living with older family members, says the Atlanta Federal Reserve. Compare that with 39 percent in 1990 and 35 percent in 1980. As the economy recovers, economists expect more workers to find jobs and start entering the competition for rentals.

·         Tighter lending standards. Homeownership has dropped to an all-time low after the crash as lenders grew very fussy about whom they’d offer a mortgage. Homeownership rates in the U.S. fell to 65 percent in June, after climbing to a record high of 69 percent in 2005, according to the Census Bureau (see Table 14).

·         Rising home prices. Lenders are loosening up their standards a little (but not a lot). But just as it started getting easier to finance a home, prices began rising – skyrocketing in some areas. That’s also pushing more people to rent, The Wall Street Journal says.

·         Busted boomers.  A growing population of downsizing retirees and empty nesters who’ve lost retirement savings and need to rent is contributing to the demand.

Rents are rising

All of this translates into rising rents. Given the increased competition and tight supply of homes for rent, it’s no surprise that landlords are pushing rents higher.

Reis, which analyzes rents, says the average apartment rent now is $1,073. It rose 1 percent last quarter and 3 percent over a year ago. Not one of the 79 markets tracked by Reis saw rents fall.

In fact, the weak growth in salaries and new jobs has kept rents from rising even higher, Reuters says.

“Landlords would like to raise rents faster, but most tenants simply can’t afford to pay more right now,” Reis senior economist Ryan Severino told CNBC.

In the third quarter, according to Reis:

·         Vacancies. The supply of apartments was tightest in New Haven, Conn., and most plentiful in Memphis, Tenn.

·         Increases. The nation’s biggest rent hikes – 2.2 percent – pushed the average price paid to $2,043 per month in San Francisco, and $1,686 in San Jose, Calif.

·         Highest rents. New Yorkers pay the highest rents in the nation: $3,049 per month on average, an increase of 0.9 percent.

·         Lowest rents. The cheapest rentals in the country are in Wichita, Kan., at $529 per month, a 0.8 percent increase.

The future for renters

It’s hard to tell how high rents will go. On one hand, demand is likely to keep growing. According to real estate brokerage Marcus & Millichap:

The oldest echo boomers just turned 28 years old and will create a significant number of households over the next two years. Additional households will form with the arrival of 1.2 million [to] 1.6 million immigrants annually through 2017.

On the other hand, new construction will eventually absorb demand. Rental investors have been slow to respond with new apartments because construction takes a long time from start to finish. Builders must find and buy land and submit to the local permitting process before they can even break ground.

Rents won’t keep rising forever. “‘You just can’t have double-digit rent growth every year or rents would be a million bucks,’ said Bob Faith, founder of Greystar Real Estate Partners, a Charleston, S.C.-based company that owns and operates about 216,000 rental units nationwide,” the Journal says.