What’s Behind Skyrocketing US Rents?

With House Prices Still Steep, Renters Are Now Feeling the Pain

Continued high home prices, inflation and other factors are hitting renters in the pocketbook. (FOTOGRIN/Shutterstock)

Part I of a series

Moving to a new city and searching for a place to live can be challenging. Home prices are high, and interest rates are climbing. As a result, many people are turning to rental properties to wait it out.

Rental properties are a casualty of high interest rates and skyrocketing home prices. But these aren’t the only factors that contribute to high rents.

Key to dealing with any situation effectively is understanding its root causes. In this article, we‘ll take a look at why rents are increasing.  Then, we’ll look at ways to avoid or deal with high rents, in part II of this series.

Single-Family Rents Rise Dramatically

Rents have been steadily rising. A look at property analyst CoreLogic’s National Single-Family Rent Index shows that between 2020 and 2021, rent increases had slowed to around three percent for low and middle-tier housing and about 5 percent for high-middle and high-tier rentals. But things have changed in the past year.

Rents have increased by more than 12 percent for low-tier rents and around 13 percent for upper-tier rents. They’re up to around 14 percent for the low middle tier and middle tier.

Miami had the highest year-over-year increase for a single-family home, at 40.7 percent. Orlando was second at 24.6 percent.

For the millennials who usually go for apartments, the highest year-over-year increase for a single-bedroom apartment was in Austin, Texas, at 108.2 percent.

Regional Industry Surges Contribute to High Rent

Companies are moving to the sunbelt on a massive scale.  This is contributing to rent increases. More people are flocking to cities like Austin to take advantage of tech jobs. There’s a bounce-back as a result. Purchasing a house comes at a premium. And with the high demand for homes, this means people must wait until homes become available. And this means renting.

Others, who can’t afford to buy, are forced to look for rentals, only to find they’re paying as much as a mortgage.

Shortage of Single Family Homes

There’s a housing shortage in more than half of U.S. metro areas. Even before the pandemic hit in 2018, there was a national housing shortage of 2.5 million units. In 2020 the housing deficit was 3.8 million units. An article in Think Realty magazine recently estimated the current housing shortage at 5.24 million homes.

The slowdown in construction after 2006 has caught up with buyers and renters in the United States, and although housing construction increased in 2021 and 2022, it will take years to fill the need.

This shortage applies to both homes for purchase and rental properties. They are not abundantly available, and the ones that are, come at a premium.

Building Materials in Short Supply

Authorization for new construction has reached an all-time high. The Department of Commerce reports that the number of houses approved but not yet built is at a 15-year high. Labor and materials shortages have kept contractors from building.

Global factory closings due to the pandemic have interrupted supply chains. And demand for new builds and current home renovations puts greater pressure on the existing suppliers. The result is shortages and high prices.

The cost of materials directly contributes to the cost of a home. This drives the price of new homes up, making them unaffordable to many people. Renting becomes the only option. Consequently, there is more competition for rentals, and rents increase.

Construction Labor Comes at a Premium

Contractors have had an aging labor pool for many years. Young men and women weren’t following in their parent’s career footsteps like in the past. The construction industry has seen an eight percent drop in construction workers between the ages of 25 to 54. And because it’s an older workforce, the fear is a fifth of these workers will leave in the next six years.

Many younger workers who were laid off during the pandemic never returned. And others took the opportunity to retire.

Unfortunately, construction wages in 2021 increased by 7.9 percent, while transportation and warehousing jobs increased by 12.6 percent. This added even more pressure on the construction labor market.

As a result, contractors will be forced to increase wages to attract labor, which will just inflate housing costs more.

Lack of Loans for Contractors

The 2008 housing crisis made both financial institutions and contractors nervous. As a result, banks and credit unions are taking a hard look at loans on speculative building projects. Construction companies have also been more conservative when it comes to borrowing. This combination results in fewer housing and rental properties available.

Zoning Causes Multi-Family Housing Shortage

Multi-family housing for renters and owners is not permitted in many cities.  Three-quarters of land in the majority of U.S. cities have barriers to multi-family zoning.

Often, height caps and lot sizes also limit the financial feasibility of building multi-family housing. This affects duplexes, apartment buildings, and townhouses.

The people who are hit the hardest are renters, often in urban areas, who are looking for affordable housing near their jobs.

Rent Control Deters Incentives

Some cities like San Francisco and New York have rent controls. These cities have a cap as to what percentage landlords can raise the rent. But rent controls can do more harm than good. Rent controls deter construction. Builders don’t want to build if they can’t charge what’s needed to make a profit.

Rent control also deters owners from reinvesting in their properties. In addition, the rent doesn’t provide enough for building maintenance, so buildings start to deteriorate.

Summing Up

Rental prices will probably continue to increase along with inflation. With a shortage of houses to purchase and higher interest rates, those who usually buy will rent instead. The high cost of labor and building materials will contribute to overall housing prices. This will put more financial pressure on those looking to rent. And finally, restrictions on multi-family housing in urban areas will put additional strain on available units and contribute to rent increases.

 In my next look at rising rental prices, we'll address some creative solutions for dealing with steep rents.

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