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

Tenants Continue To Be Burdened By Daunting Rents

Written by Than Merrill

The housing market has made considerable progress in the years following the recession. What ranked as one of the worst depressions in American history, is now comfortably behind us. Post recession price appreciation has catapulted home values and equity. For all intents and purposes, the rebound we have been waiting for is gaining traction. However, as a result, rents remain unchecked. With 2015 rapidly approaching, rents are skyrocketing past wages. Rents have raised most in markets where renters are already stretched thinnest. In the five least affordable markets, rents are now 7.8 percent higher than they were a year ago. Fortunately, there is a light at the end of the tunnel. Experts expect rents to ease slightly as we enter into next year.

Certain cities, in particular, are becoming too expensive for the average renter in their area. Miami, Los Angeles and New York are witnessing rents soar. It is not uncommon for the average rent check to consist of more than half, if not more than, a tenant’s salary.

“Rents are rising because of strong demand that supply hasn’t kept up with. Nearly all the new households are renters, and young people moving out of their parents’ homes will keep fueling rental demand,” said Jed Kolko, chief economist at Trulia.

Due largely, in part, to relatively strong demand and an inventory that needs to catch up, rents have increased on a national level. In fact, data suggests that these factors have served to increase rents by as much as 6 percent over the course of a year.

Mortgage lenders and traditional institutions have preached for years that housing costs (mortgage or rents) should not exceed more than 30 percent. As a reference, those costs will include expenses like interest, principal, taxes and insurance. However, renters in San Francisco, San Diego, Boston, Baltimore, Washington, D.C., and Chicago pay more than that for a two-bedroom rental, according to Trulia. While rents are high across the country, these cities are skewing ratios.

With rents higher than they have ever been before, tenants are forking over a small fortune every month. It begs the question, why don’t more renters buy?

“Both rents and [home] prices are outpacing income growth, so neither renting nor buying has become more within reach of what people can afford. Plus, paying more on rent makes it harder for would-be homebuyers to save for a down payment,” Kolko said.

Despite recent history, nothing suggests that rental demand will begin to cool off. The torrid pace in which people are flocking to rentals appears to suggest a strong trend that is here to stay for the foreseeable future.

Apartment vacancies did rise slightly in the third quarter for the first time in 4½ years, according to Reis analytics firm, but that was largely due to more rental supply coming on line. More than 46,000 units were delivered during the quarter. This is the second-highest quarterly amount since the fourth quarter of 2002. Year to date, 113,024 units have been delivered.

“Units brought online during tight market environments have a tendency to actually push rents upward, not downward,” according to Ryan Severino, a senior economist at Reis. “So landlords should still be able to push asking rent increases on to their tenants.”

Experts familiar with the market suggest that the market has reached an inflection point. Accordingly, vacancies have bottomed out and are expected to rise at a slow pace. Should this happen, rents are expected to ease as the calendar turns to 2015.