Last modified on March 14th, 2016
By Alexis Hammond
In recent years, the number of renters increased as homeownership declined. According to the Joint Center of Housing Studies at Harvard, this country is enjoying the highest proportional rental demand in half of a century. As demand has grown, rental rates have spiked across most large markets in the United States. Average total rates have increased, and they have also grown as a percentage of the average renter’s income.
Of course, property owners and managers benefit from high rental demand and increasing rental prices. Still, rental affordability has become a serious concern with urban planners and housing departments. Rental demand is expected to keep growing during the next decade and maybe even after that. There might be some concerns that both the issue of affordability and an increased inventory supply will put a cap on that growth in the future; however, that doesn’t mean that demand is expected to decline.
Why Affordability Might Constrain Rental Prices
Despite recent growth in rental prices, according to the Urban Land Institute, these are some signs that affordability may start putting the lid on increasing prices soon:
Millennials: One of the major populations to favor renting over buying more than they used to has been 25- to 34-year old adults. Getting married and having kids tend to be the kind of life events that are associated with purchasing a home. These events were also declining, but that trend seems to be reversing. An increase in homeownership is expected to follow.
Interest rates for mortgages: Interest rates did increase a little, but they rose only slightly from historically low levels. If borrowers can obtain low-interest mortgages, homeownership might seem cheaper than renting for some individuals and families. This may be particularly true for the high-end rental markets where most renters do have a choice.
Rental inventories: Right now, many U.S. markets enjoy occupancy rates of 95 percent or more. However, these occupancy rates have attracted more investors into the market. As more apartments get built or single-family homes get converted to rentals, supply will increase. If supplies begin to overtake demand, rental rates could soften.
Renter incomes: In addition, about 46 percent of renters paid more than 30 percent of their household rents in 2014. Typically, rent between 25 to 30 percent of income is considered affordable. This is an increase in rent as a percentage of income from about 40 percent for renters in 2004. At some point, unaffordable rents could force people to find some other housing alternative, and this could decrease demand.
There is Still Plenty of Room for the Rental Market to Grow
Despite these concerns, there’s no reason to feel pessimistic about the U.S. rental market. Officially, rents have increased by about three percent a year, but that calculation includes some rent-controlled areas. According to investment trusts, the true rate of increases has been approaching five percent. In 2009, there were only a little over 100,000 multifamily starts in the entire country. That number should increase to over 400,000 this year and approach 460,000 in the next couple of years.
The demand for rental properties is still expected to increase over the next decade. The Urban Land Institute’s report was very optimistic about the rental market as a whole. Concerns that were expressed centered mostly about the issue of affordability, particularly in some parts of the country. Even though the market for more expensive rentals for high-income families and individuals is expected to increase, it may be more limited than the market for middle-class and working-class housing. The caution was to make sure that the particular market for each type of property was really as large as anticipated.