Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Demand Continues To Fuel Higher Rents

Written by Than Merrill

The financial transgressions of the latest recession still resonate loudly within the U.S. housing market. Strict underwriting protocol and heaps of foreclosures serve as a constant reminder of where we stood just 8 years ago. However, while some might argue as to the duration of the recovery, it is difficult to dispute that things have gotten better. For the better part of a decade, the housing market has made improvements – albeit small ones. A considerable amount of equity has returned to the market, as homeowners were the beneficiaries of historically high appreciation rates. Perhaps even more importantly, the expansion of the economy has created more sustainable jobs. Having said that, only one thing has really kept pace with the appreciation of home values: rental asking prices. Smaller markets are seeing spikes in rental asking prices that rival – and even trump – some of the hottest markets in the country.

Traditionally, larger metropolitan areas have been associated with higher rents. Increased demand and a lack of inventory will tend to do that. However, smaller cities – not to be outdone by their larger counterparts – have seen rental asking prices rise exponentially. Economic conditions are finally able to support the formation of new jobs and households. It just so happens that the new households are primarily rentals. With the homeownership rate continuing its downward spiral, rental properties are becoming all the rage. That said, even smaller cities are seeing a jump in rental asking prices.

With homes having nearly returned to their pre-recession levels, many have overlooked the fact that the rental market had one of its strongest showings since the recession. January saw rents rise nearly 5 percent annually. Moreover, occupancy has topped out at 94.6 percent. In the face of high rates, more and more people are flocking to rentals. With the recession still fresh on the minds of millions of Americans, owning a home is not only too pricy, but also not necessarily worth the risk. Truth be told, the majority of Americans only have one option: renting.

California harbors 4 of the nation’s 5 most expensive markets to own. The most expensive housing market is San Jose, where the median home price was $899,500, followed by San Francisco, San Diego and Los Angeles. Not surprisingly, California also has the highest rents, but other smaller markets are challenging it fore the top spot. Among January’s fastest-growing rental markets were Denver, Kansas City, Nashville, Portland, and Charlotte.

While each of these cities may not have demanded the highest rates, they exhibited the biggest annual increases. According to Zillow, Kansas City saw rental asking prices increase 8.5 percent over the course of a year. Not only was that rate two times larger than the national average, but it also surpassed perennial powerhouses like Boston and Seattle.

“Rental appreciation has been a freight train these past few years, chugging along without any appreciable slowdown. Since 2000, rents have grown roughly twice as fast as wages, and you don’t have to be an economist to understand why that is hugely problematic,” said Zillow’s chief economist, Stan Humphries.

Several factors serve as the driving force behind the recent demand for rental units. In particular, household formation has dramatically increased demand. As younger Americans leave the homes in which they grew up in, they are simultaneously seeking the refuge of a rental space. Coming up with the down payment for a home and meeting strict mortgage underwritings is simply too much for younger populations. Renting is really the only option they have. The demand for rental units is only magnified in smaller markets now.

“Some of the smaller markets have seen less supply than some of the larger markets have during this apartment cycle,” said Stephanie McCleskey of Axiometrics. “High occupancy rates coupled with steady job growth and a limited amount of new supply have given property owners the pricing power to continue to push rents.”

The duration in which younger Americans are occupying rental units has also seen an uptick. Again, rents have never been higher. It is simply too hard to meet the lofty demands of today’s down payments when rents eat away at savings. Equally as important, however, is a distinct lack of inventory. A lack of homes continues to prevent first-time buyers from actively participating in the market, whether they can afford to or not.

“The rental market used to be and should remain a stepping stone to homeownership. But given how widespread rental affordability problems have become, the rental market could be acting more like a barrier to buying,” said Humphries.

Some cities have seen it become cheaper to own than rent, but the higher prices continue to hold renters in place. However, potential buyers face one more daunting task if they can procure the appropriate funds: the credit process. In an attempt to avoid another downturn, lending institutions tightened their credit standards and underwritings. The resulting process makes it incredibly difficult for a lot of buyers to even gain approval.

Interestingly enough, price gains are beginning to taper in the face of increasing rents. Some believe that 2015 is the year that first-time buyers can start to clear the credit and down payment hurdles that have essentially prevented them from taking any action. With any luck, this year will be the catalyst for prospective buyers to make the jump to homeownership – a move that could really help the recovery gain traction.