The housing rental market was already priced too high, with average rents sitting at about $2,000 per month, as skyrocketing inflation was putting even more pressure on household budgets. However now things are poised to get even worse.
To start with, institutional investors like Blackrock have experienced a flood of capital, which they need to park somewhere in which the principle will be safe as it continues to provide a return. This has produced a flood of institutional investors buying homes and converting them to rental properties, with an eye to watching their principle appreciate with real estate prices, as they acquire regular returns in the form of monthly rent. This is serving to apply upward pressures on home prices.
Meanwhile, as the Fed tries to get inflation under control, it is raising interest rates. That in turn is raising the cost of mortgages, and that is beginning to price less affluent homebuyers out of the purchasing market, diverting them right back into the rental market, putting even more pressure on that market and driving rents even higher.
Even as these potential home buyers are priced out of the market, the pressures applied by the institutional investors are still supporting the high home prices.
Jon Ziglar, CEO at Rent.com noted how rising mortgage rates are, “pushing some people out of the home buying market and pushing them back into the rental market. So you’re gonna have a lot more competition for those apartments and those rentals, especially, in the higher end, where those folks that were going to be homebuyers are now going to ultimately move into the rental side.”
Even as 30 year mortgage rates fell to 5.70% last week, from 5.8% the week before, most economists have said they think rates will rise to 6% before the end of the year, as the Fed continues with a regimen of regular policy tightening going forward. All of those higher costs ultimately translate into upward pressures on the rental market.
Ziglar notes that year over year, the average rental cost for a one bedroom apartment has already risen 27%. In Miami, a single family home rental is up 40.8% year over year in April, while Orlando has seen rent increase 25.8%, and Phoenix is up 17.8%.
Ziglar said, “We’ve already seen an increase in appreciation, particularly in the Sunbelt markets and metro markets like Austin, Texas, that are up over 100% year over year. At the top end of the market, we are going to have prices reset and stay at those elevated levels.”
On top of everything, rent moratoriums and rental assistance programs from the pandemic are now phasing out, all of which is making the rental market even more problematic.
Ziglar noted, “We are seeing evictions that are at 150%, even up to 200%, of historic norms in a number of markets. So I do think we are probably going to see evictions increase, most likely because of the fact that you’ve got rents staying at these levels that are generally elevated versus the last two years. In addition to that, you have massive inflation, prices at the pump, prices at the grocery store. And so the ability to maintain the payments on those rents, along with the increased cost of living, is going to be very difficult.”
