Rental Market Trends: 2021 in Review, 2022 Outlook
We predict growth in rents will continue through 2022 though not at the same rate as 2020-2021. However, the ongoing lack of affordable rentals and housing will spur rental demand. The following are most important real estate trends of 2021 and their impact on the 2022 housing and rental markets.
With the U.S. housing market is nearly 4 million short what is needed to meet demand, we expect the rate of homeownership to be stable through 2022–or until supply chains allow for more new housing construction. However, with more millennials and first time homeowners entering the housing market, we may see slight increases in homeownership rates through the end of 2022. Increase demand, spawned by first time homeowners, will, however, be curbed by the lack of affordable housing. The average price of a starter home is up over 18.1% from 2020 to 2021. Goldman economists predict US homes will grow another 16% through 2022 due to housing shortage and inflationary factors.
Between 2004 and 2016 the number of households renting increased by nearly 20%, jumping from just under 37 million in 2004 to over 44 million by third quarter 2017. In 2020, there are still at roughly 44 million households renting. Notwithstanding slow growth in rental households in recent years, since 1975 there has been an upward trend in rental household which we expect to continue in coming years.
Over this same period of time, homeownership increased roughly 1%, from 74 million to 75 million. By the second quarter of 2021, homeownership grew to 82.5 million owner-occupied households according to the U.S.Census Bureau. Notwithstanding an uptick home sales and strong national economy, NAIPO predicts that the rate of growth in renter households will outpase growth in owner households through 2023 due to growth in housing prices and demand.
The level of cost-burdened renters–those spending over half their income on rental housing–fell from 50.6% in 2015 to 49.7% in 2016, due in part to renter income growth outpacing rent growth. In fact, 2017 saw the highest increase in higher-income renters since 2008. The percentage of high-income renters grew by 4.2% between 2005 and 2016, while the percentage of low-income renters decreased by roughly the same amount. Unfortunately, in recent years this trend has shifted. According to the America’s Rental Housing 2020 report published by Harvard, growth in rents is now outpacing growth in incomes. The number of cost-burned renters is on the rise due to contraints on supply of affordable housing, decline in low-cost rentals and growth in high-income renters. The largest growth in high-income renters continues to be found in larger metro areas that have strong economies and job growth.
Growth in homeownership in 2023 will be driven by high-income renters making a first time home purchase.
Growing Rent Prices and Supply of Multifamily Housing
2020-2021 experienced an unprecedented reversal in rental rates with a steep decline beginning in 2020 followed by 8.3% year-over-year growth in rental prices by July of 2021. The average U.S. monthly rent as of the time of this report is now $1,549.
In 65 of the largest metro areas in the US, rent rates grew by more than 10% year over year–including 22 regions where annual growth in effective rents increased more that 15%.
Boise, ID–at 24.2% rent growth–posted the most aggressive growth in rent prices of all 150 metro areas. Larger markets, such as Phoenix, registered 21.6% growth in rent prices, along with Las Vegas, Tampe and Palm Beach which saw rent hikes of nearly 20%.
Other major metro areas includin Jacksonville, Atlanta, Fort Lauderdale, Riverside/San Bernardino and Sacramento experienced year over year growth in rent prices between 15% and 17%.
Notwithstanding the growth in rent prices, rental vacancy rates continue to decline with rental occupancy reaching and all-time high of 96.5% in mid-2021. From Q3 2009 through Q2 2021, the U.S. rental occupancy declined from 11.1 t 6.2, repectively. Occupancy rates for multifamily housing are softest in markets where the most new construction of apartments, duplexes and other rental properties is occurring. We’re seeing rental occupancy rates are almost directly proportionate to fluctuations in supply. Some of the tightest rental markets that have experienced overall decline in occupancy rates in recent years, including Dallas, Denver and Seattle are now experiencing growth in occupancy.
Growth in new rental units is not predicted to alleviate rent and housing pressure in the affordable-rental markets. Most new-supply growth during 2021 will be for higher-end properties for mid-priced to higher-income renters.
Without exception the availability of affordable rental housing is on the decline nationwide. Between 2005 and 2016 the number of occupied rental units priced under $800 per month fell by 1.2 million. Today, with the average rental price nationwide at $1,549, it’s difficult to find any reasonable 2-3 bedroom rental unit under $1,000 a month–even in the softest markets.
For low-income families–those earning less than 50% of the media wage in their area–finding an accommodating apartment, that they can affordable, is challenging. Between 2010 and 2017, the number of “affordable” apartments as a percentage of all available apartments nationwide, fell from 11% to 4.3% and remain roughly the same four years later.
There is–and will continue to be–a need for more affordable housing for severely cost-burdened renters, defined as those households spending over 50% of their income on rent. Currently, about 25% of renters nationwide are severely cost-burned, but in many areas the number is as high 30%. In fact, only 6% of the largest U.S. metro areas have cost-burdened renter rates below 20%.
Affordable housing will continue to be elusive for many households through 2022, as most new construction is targeting higher-income renters.