Connect with us

Stocks

Will Sky-High Rent Prices Go Down in 2022? 2023?

Rent prices across the nation have soared nearly 30% since last year, according to a new report. As fears continue to swirl around the notion of a housing market crash, it seems rental prices have been an unforeseen externality.
So, why exactl…

Rent prices across the nation have soared nearly 30% since last year, according to a new report. As fears continue to swirl around the notion of a housing market crash, it seems rental prices have been an unforeseen externality.

So, why exactly is rent so high?

Advertisement

Well, as inflation remains top of mind for many Americans, rising rent payments have proven to be one of the more direct consequences of elevated prices. With that said, there is no single driver of the increase in rental prices, but rather an entourage of effects contributing to its climb over the past year.

As per new data from Dwellsy, the median asking rent in August was $2,110, up from $1,650 the year prior. The $460 increase has much to do with the state of housing as a whole. Just as the pinched supply of homes for sale propped up housing prices through much of the year despite wavering demand, there remains a limited inventory of rentals available.

Advertisement

Unlike homes for sale, however, the demand for rentals is at one of its highest levels in U.S. history. Indeed, with mortgage rates continuing to reach new highs, a growing number of Americans, especially families, are opting to rent rather than pay the costly mortgage premium to buy. As such, rentals are more or less in the same place housing was just a year ago. Sky-high demand, met with limited supply, generally equals unbridled price growth.

This begs the question, when will rent come down?

Advertisement

‘Relief For Renters on the Horizon,’ According to Dwellsy CEO

Jonas Bordo, chief executive and co-founder of Dwellsy, commented on the forces behind the rise in rental costs:

Advertisement

“If you want to get a bit further into the details, single-family home rentals are driving the overall market. Nationwide, that rental type is highly sought-after because Americans are looking for bigger places to live. (We can thank the pandemic for that, at least in part: People want more space for home offices … and from each other.) Rent has accordingly risen more than 36 percent from August 2021. Believe it or not, there are some cities where the asking rent has grown by over 100 percent because the steep demand for single-family rental homes is pushing up overall rental costs.”

The fact that single-family rentals are bearing the brunt of the price increase is important. Apartment rent is only up 4.7% year-over-year. Clearly, elevated mortgage rates are having an outweighed effect on would-be home-buying households, as reflected in the growth of single-home rentals. With that in mind, we can expect rental rates to likely ease alongside mortgage rates.

Advertisement

According to Bordo, there is evidence that a slowdown has already begun.

“The good news is, there’s a little relief for renters on the horizon. Despite the massive year-over-year increase, August saw only a 0.5 percent (or $10) increase in median asking rent. That’s significant because we would normally expect rent to increase by 1 percent as rents approach their seasonal peak in the early fall. I do expect this slowdown to continue.”

Advertisement

However, there are other forces at play that may put downward pressure on rental rates.

Advertisement

Will Rent Prices Come Down Next Year?

Mortgage rates are currently trending at startlingly high levels. Just this week, Freddie Mac reported that the 30-year fixed rate mortgage hit 6.29%, almost triple the 2.88% rate recorded just a year ago and about the level reached during the 2008 housing crisis. While it may be easy to look at how high mortgage rates are and assume a downturn is inevitable, it’s more complicated than that.

Mortgage rates technically operate independently from things like interest rates and the federal funds rate. However, they frequently move in conjunction with each other. That’s because mortgage rates tend to track 10-year Treasury yields, which are heavily influenced by interest rate expectations. The 10-year is currently operating at its highest level since 2011. And with another two potential rate hikes on the way through the remaining Federal Reserve Open Market Committee (FOMC) meetings, borrowing rates may well have further room to grow.

Advertisement

As households continue to favor renting over buying, it’s unlikely that rental rates will come down. As long as mortgages remain elevated, households will probably not switch back to buying homes. And as long as interest rates continue to climb (pushing up Treasury yields in the process), it’s unlikely that mortgage rates will fall substantially. It’s ugly, complicated and increasingly uncertain. But it remains the most logical chain of events necessary for rental rates to return to normal.

If the economy slows down more drastically over the coming months, the Fed may back off its hawkish agenda. Should a Fed-induced recession prove a bit more than the central bank bargained for, they may even opt to lower interest rates at some point next year or in 2024. That, through the aforementioned sequence of events, would lower rental rates. But, at the end of the day, this is speculative. Rental rates are likely at the whim of time, and time alone.

Advertisement

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

Advertisement

More From InvestorPlace

  • Buy This $5 Stock BEFORE This Apple Project Goes Live
  • The Best $1 Investment You Can Make Today
  • Early Bitcoin Millionaire Reveals His Next Big Crypto Trade “On Air”

The post Will Sky-High Rent Prices Go Down in 2022? 2023? appeared first on InvestorPlace.

InvestorPlace| InvestorPlace

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published.