The No. 1 Reason Rental Prices Are Soaring Right Now

In the early days of the COVID-19 pandemic, the big housing story was how prices were soaring due to the historic shortage of properties for sale. Now this shortfall is spilling over into the rental market.

The reason that rents are rising so quickly is more people are competing for places to live. The rental vacancy rate fell to 5.8%—the lowest it’s been since the mid-1980s, according to a recent report from the Joint Center for Housing Studies of Harvard University. And rents spiked in response, rising 19.3% annually in December in the 50 largest housing markets, according to the most recent® data.

This is hurting lower-income renters the worst as the housing shortage coupled with high prices is making it difficult to find places to live that fit their budgets.

“Rental conditions are unprecedented, perhaps insane, across the country,” says Alexander Hermann, a senior research analyst at Harvard’s Joint Center. “What’s happening in the rental market raises concerns about affordability, particularly for people of color and lower-income households.”

Why is there a rental shortage?

There were 44 million renter households in the third quarter of 2021, an increase of about 870,000 since the first quarter of 2020 before the pandemic took off in America.

There isn’t just one simple explanation for the steep rise of renters.

At the start of the pandemic, lots of folks lost their jobs and incomes and moved in with their families. Now that the economy is stronger and the job market rebounded, many are venturing back out on their own—which means they need new places to live. There are also couples who split up, who now need two residences, as well as a larger population in need of housing following years of underbuilding new rental housing.

Many renters, including those with the lowest incomes, stayed put during the pandemic thanks to eviction moratoriums. Even as many of those protections expired, there was no eviction wave as some real estate experts predicted. This kept the market tight.

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

Another reason for the surge in demand for rentals is that many would-be homeowners were thwarted by fast-rising prices and a lack of homes for sale. As rents have risen, it’s become harder for renters to save up for a down payment and closing costs. So instead they remained tenants.

They’re also competing with big investors, some of which can make attractive all-cash offers.

More businesses became landlords in 2021 instead of mom and pop investors who own a property or two. The percentage of larger investors, such as hedge and pension funds and large financial companies, purchasing rental properties reached its highest level in two decades, according to the report. About three-quarters of those sales were for single-family homes.

More big landlords have been getting into the rental game since the turn of the century. From 2001 to 2018, the percentage of large landlords rose 8 percentage points, to make up 26% of all rental owners, according to the report.

“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,” says Hermann.

Most renters kept up their payments during the pandemic—despite the eviction 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.

“It’s a combination of the federal government doing its job … and some landlord flexibility that has allowed people to stay in their homes,” says Hermann.

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