E Economics

Why US Rents Are Increasing By More Than 10% YoY?

21 September, 2021
rents

For a few months, one of the key developments in the US housing market has been the rebound of the rental market. According to the latest figures, US rents increased by more than 10% YoY in August. The move has been supported by at least five major factors: rent-versus-own arbitrage, improving national mobility, demographics, increasing funds participation, and wage increases in specific lower-paid industries. In addition, the end of the federal eviction moratorium could further exacerbate this upside spiral.

This article was co-written with Logan Mohtashami, Lead Analyst at HousingWire.

1. Elevated Housing Prices Have Squeezed First-Time Buyers

The violent spike in existing home prices due to better mortgage demand in 2020 and 2021 has pushed total housing inventory to all-time lows. This reality has created bidding wars where young homebuyers with significantly lower down payments can’t compete against other mortgage and cash buyers.  

Even with the increased inventory in 2021, the days on the market per the last NAR report was 17 days, well below what the market had to deal with from 2008-2019. After almost two years of significant price gains, some would-be homebuyers have just thrown in the towel out of frustration. You can see the disappointment in home buyer sentiment surveys as the question of is this a good time to buy has collapsed. This while existing home sales are at pre-cycle highs in 2021. If you can’t win the bid, you must live somewhere, which has created even more demand for renting shelter.

Data for July confirm that housing prices growth kept strengthening. The CoreLogic House Price grew by 18% YoY, the largest 12-month growth in the US index since the series began (January 1976 – January 1977). In the meantime, the Freddie Mac House Price index increased by 20.1% YoY in July (the largest increase since data are recorded back to 1975). In this context, we also expect the S&P CoreLogic Case-Shiller 20-City Composite index to jump by more than 20% YoY in July (release scheduled for September 28th).

This situation explains why, since last year, buying conditions for homes have deteriorated (reaching the worst level in decades), and first-time buyers have been forced to rent rather than buy a home.

Rents-Bad-conditions

2. The Improvement Of National Mobility

The Covid-19 pandemic, with the associated lockdowns, has produced unprecedented restrictions on movement leading to a collapse of mobility. As a result, applications for rental homes fell sharply early in the pandemic and have then rebounded. Reopening allowed millions of people to move again. Among them, younger people, who stayed with their parents, have left and applied for rental homes.

Rents-Mobility

3. Demographics Has Never Been So Supportive For Rents

Interestingly, millennials and specifically those between the ages of 25-34, who are in their prime homebuying years, are dealing with more homebuyers in 2020 and 2021 than any period from 2008-2019 as existing home sales are at pre-cycle highs. They are about 46.1 million strong (see Marketing Chartsand make up the most significant demographic patch ever recorded. The problem is that a portion of them took out student loans and have delayed their home buying. Those that have taken on student loan debt but never finished college have shown more financial hardship than those who finished college. This group is more likely to rent for a more extended period in their 20’s and 30’s, and maybe forever.

4. Funds Arrival Has Pushed Rents Higher

One of the game-changers in the rental market has been the increasing participation of funds. Bloomberg reported “Investors spent $53 billion on multifamily real estate during in the three months ending in June, the most ever for the second quarter, according to data from Real Capital Analytics.” The article also highlighted “The spree extended a busy year for apartment investors that has included purchases by Blackstone Group Inc. and Starwood Capital Group. It was also fueled by real estate money moving to housing from offices, hotels and malls, which have fared poorly in the pandemic.

In this context, Federal Reserve Bank of Dallas President Robert Kaplan flagged that the housing market is overheating. He noted “we’re hearing more and more that the winning bidder for many of these single-family homes isn’t a family: It’s a fund of some type, not domiciled in our district, buying sight-unseen and planning to rent it. More and more families are being squeezed out of purchasing a home, particularly first-time home buyers and across at-risk communities. This is having ripple effects, in terms of higher rents and higher property taxes.

5. Wage Increases In Certain Lower-Paid Industries Contributed To The spike of Rents

In a very interesting column for BloombergConor Sen also examined the factors behind the revival of the rental market. He noted that a key factor “is the speed of wage increases in certain lower-paid service industries as companies like Amazon.com Inc., Chipotle Mexican Grill Inc., and Costco Wholesale Corp. engage in an arms race to staff warehouses, restaurants and big box stores. While it won’t affect luxury apartments in New York or San Francisco, the higher wages will empower landlords to raise rents, particularly in metro areas that are housing-constrained.

Several proxies, such as the quitting rate, suggest that wages growth is likely to accelerate in the coming months.

rents-wages

6. The End Of Federal Eviction Moratorium Could Further Exacerbate Rents Upside Spiral

The national eviction ban is no longer in effect, after the Supreme Court struck it down on August 26. Even though there are still some exceptions (that are slated to expire later this year), most of states will no longer interfere to protect tenants.

In this context, landlords may evict roughly 750,000 U.S. households by the end of the year, according to Goldman Sachs analysts.

Of course, the surge in evictions would create new inventory of available rental housing which could ease pressure on overall market. Yet, renters could be also tempted to raise prices dramatically taking into account the recent spike and compensating previous losses.

At this stage, it’s still difficult to evaluate with precision which effect will be stronger at the national level especially as it will also depend on employment situation. Whatever, the situation should be monitored carefully as it could have serious economic, social and political consequences.