Have you been victimized by soaring rent prices? If so, you’re not alone: Some cities have seen average rents increase by as much as 40%, indicating just how severe the rental crisis has become.
Like most economic phenomena, there’s no singular root cause behind the rental price surge. Instead, a confluence of factors is to blame, and some of those factors might surprise you.
Learn why rent prices are high. In the process, you might glean insights into how to stop living paycheck to paycheck and start cutting the cost of your living expenses.
Rental demand is soaring as inventory remains low
At the height of the pandemic, millions of people under 30 weren’t able to leave the nest. Others who previously had moved out from their parents’ homes were forced to move back in with their families.
But now, those who can afford to are looking for a space of their own — and that’s in addition to the annual wave of young adults coming of age and searching for more independence.
Those two factors are putting further strain on a rental market already stressed by a low inventory of rentals.
Between current homeowners holding onto their properties and a new-construction shortfall, there simply aren’t enough rental units to keep up with demand. As people compete with one another for a relatively small number of rentals, prices increase.
Wealthier renters are relocating
Rising rent isn’t just a problem in hot markets, either. With the solidification of the work-from-home trend, people aren’t tied to one location like they used to be.
This has allowed wealthier earners to move out of hot housing markets and into more affordable places. When these relatively well-heeled renters reach their new cities, they are willing to pay more for the limited number of rentals that are available, forcing rents even higher.
Mortgage interest rates are high
Mortgage rates have been climbing for most of the year, and that translates into higher monthly mortgage payments.
As an example, consider the payments on a $450,000 house. On a 30-year fixed mortgage with a 20% down payment at a 5% interest rate, you’d pay $2,294 each month. But if your interest rate increased by even 1 percentage point, your payments would jump to $2,520.
So, how is this hurting renters? Would-be homebuyers who cannot afford a mortgage are forced to rent instead, increasing demand for rentals. In addition, landlords and investors are increasing their rents to compensate for their own higher loan payments.
High home prices are forcing people to rent
Most of us understand the basic law of supply and demand: When supply outpaces demand, prices go down. But when demand outpaces supply, prices go up.
The latter scenario is exactly what has happened to the housing market.
Housing inventory levels remain low, thanks in part to a years-long decline in new builds. When the housing bubble burst in 2008, the homebuilding industry took a major hit. The industry has never fully recovered from that blow.
On top of that, global coronavirus shutdowns contributed to supply chain bottlenecks that have yet to catch up to demand.
In 2021, the National Association of Home Builders reported that more than 90% of builders were affected by lumber and appliance shortages. Not only are there fewer new construction homes in progress, but they’re taking longer to complete.
More homebuyers are competing for fewer properties, leading to bidding wars that — at least until very recently — have left homes selling for way above market value.
That is enough to discourage many potential homeowners. The only option left, then, is to rent.
Landlords are recouping pandemic-related losses
When the coronavirus pandemic first hit, government-mandated rent freezes prevented landlords from dramatically raising their tenants’ rent or evicting tenants who couldn’t pay.
Now, however, many of those moratoriums are no longer in force, and some landlords are working to make up for lost time by raising rents. Others are charging amenity fees for features and services previously included in the cost of rent.
With the end of COVID-related tenant protection, landlords and property managers now have room to charge more.
Dwindling inventory, mounting demand, and an economy still rattled by the pandemic have created a perfect storm for the rental price surge.
It’s difficult to know how soon the rental and housing markets will stabilize, or even what stabilization might look like. If that uncertainty worries you, it might be time to look at ways to reduce money stress so you are better able to handle today’s realities.
While we wait to see what’s on the other side of the surge, prioritize the financial moves that make the most sense in your situation — whether that means finding a roommate, moving back home, or getting a second job or finding other legit ways to make money.