The Reason Why Rental Prices Are Soaring Right Now

Due to the shortage of supply in rental units, we have seen rents increase expoentially over the course of the pandemic. This is hurting lower-income renters the wors as the housing hortage, alongside high prices, is making it difficult for renters to find and compete for units within their already restricted budget.

Why is there a rental shortage?

There were 44 million renter households in the third quarter of 202, an addition of 870,000 households since Q1 of 2020.

During the onset of the pandemic, there were many people that had lost their jobs and sources of income, and as a result, moved in with their families in order to curtial expenses. Now, about two years since the start of COVID-19, as life is starting to slowly transition back towards pre-pandemic conditions, we see these same individuals venturing back out on their own only to be met with a severe shortage of inventory.

In addition, due to evicition moratoriums allowing many renters to stay put during the pandemic, the market remained tight as inventory that would normally have fallen through the eviction process was protected by federal moratoriums.

Even those who can afford to buy a home may prefer to remain renters in the current market. Over the past decade, the percentage of renters earning at least $75,000 shot up 48%, according to the Harvard report. These households now make up just over a quarter of all renters.

Some prefer the higher-end amenities in some of the new rental buildings, such as co-working spaces, rooftop gardens, and pools. Others simply prefer to live in urban downtowns or other desirable areas where there are few homes for sale under $1 million—such as New York City and San Francisco.

These renters are “also occupying units that are more affordable to moderate-income and lower-income households,” says Hermann. “Over time, it’s going to drive up rents even at the low end.”

There are also those who are enticed by the single-family rental market. This allows them to live in a more spacious home with a backyard, often in more suburban areas, without having to worry about coming up with a down payment and closing costs.

Many renters would be homeowners if they could win a bidding war

Due to rents rising, this has also caused many tenants who had hoped to be able to save for a down payment to become qualified and pre-approved buyers to remain as tenants. Combine this with the fact that many lower-income earners are competing with cash buyers and big investors, the positive outlook for many buyers has understandably diminished.

More businesses became landlords in 2021 instead of mom and pop investors who own a property of two. The percentage of hedge and pension funds and large financial companies purchasing rental properties reached its highest level in two decades. Three-quarters of these sales were for single-family homes. From 2001 to 2018, the percentage of these landlords rose 8%, to comprise a quarter of all rental owners.

Due to the presence of these large investors, many people who were able to purchase homes even a few years ago are priced out of homebuying and are staying in the rental market longer.

Most renters kept up their payments during the pandemic -- despite the evicition moratorium

Despite the eviction moratorium, put in place in the early days of the pandemic when unemployment was soaring, most tenants kept paying their landlords. Only 15% were behind in the third quarter of 2021, according to the Harvard report. (The federal moratorium was instituted in March 2020 and ended in August 2021, although many cities and states have their own eviction bans with varying expiration dates.)

Lower-income tenants, who were hit disproportionately hard by the job losses, were more likely to still owe their landlords. About 23% of households earning less than $25,000 a year owed missed payments. Meanwhile, only 5% of households making more than $75,000 were behind in rent.

Black, Hispanic, and Asian renters were more likely to struggle to make rent. Almost a quarter of Black tenants, 19% of Hispanic tenants, and 18% of Asian tenants owed their landlords money in the third quarter of last year. That’s compared with just 9% of white renters who were in the same predicament.

Some tenants received federal rental assistance, despite state and local governments running into problems distributing the money to those who needed it. Stimulus checks and other federal assistance helped tenants hang on. The lack of workers resulting in hiring bonuses and big pay increases has also helped folks to remain in their homes.

Despite the pain wrought by the pandemic, eviction filings were 40% lower than they were historically, according to the Eviction Lab at Princeton University. However, the nation is still 6.8 million affordable rental units short of what’s needed.

Citations

Trapasso, Clare. “The No. 1 Reason Rental Prices Are Soaring Right Now.” Real Estate News & Insights | Realtor.com®, Real Estate News & Insights | realtor.com®, 21 Jan. 2022, www.realtor.com/news/trends/the-no-1-reason-rental-prices-are-soaring-right-now/.

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