Rents Are Falling, But Mostly For Wealthier People
It’s not some secret plan. Instead, it’s a product of multiple factors affecting the very action that should make renting more affordable for all.
On occasion, like right now, I reuse something I’ve had on Forbes. I understand that people run out of unpaid access to the site and some topics I think are worth spreading around a bit more. This is one of them.
There’s good news and bad — or at least greatly disappointing — on the rental housing front.
On the plus, Moody’s Analytics CRE, a division of the ratings agency, has been tracking rent-to-income (RTI) ratios at national and multiple metropolitan levels. The idea is to look at median household incomes and determine what portion of that money is spent on rent.
Last year in May, the firm found that for the first time in 25 years of tracking the figure, “the share of American household income needed to rent an average-priced apartment crossed the rent-burdening 30% threshold.”
There were, and are, multiple factors involved:
The cost of new construction at completion has been up roughly 40%.
Many investors put money into real estate when interest rates were low, with apartment buildings being one of the top choices. That pushed up prices and the cost of financing them.
Interest rates jumped.
Costs of running buildings, including utilities, taxes, and insurance, have grown at high rates.
The more expensive it is to own and operate apartment buildings, the more owners will charge so they can continue to make a profit. That isn’t to say all increases are financially justified. Could it be that some owners and operators of housing have been increasing rents to increase profits beyond additional costs? Certainly. But the expense issues are real and are a big reason for rapidly rising costs of housing in many areas.
The portion of renters spending more than 30% on rent and utilities (total living expenses) grew from 45% to 48.3% between 2019 and 2022.
It turns out, according to Moody’s, that the RTI percentage of typical median-income households hit its peak of 28.8% in the second quarter of 2022, less than their initial estimate. It’s been moderating since then as average year-over-year rent growth has slowed over time from 17.5% at the peak in 2022 to -0.7% at the end of 2023. Real incomes have risen, up a record 10.9% in 2022 and then slipping back to 3.9% in 2023.
As a result, median RTI is down to 27.0%. That’s the good news. Now for the greatly disappointing balance: The biggest beneficiary of falling rents have been wealthier renters, and it’s largely a matter of accident.
That last statement may rankle the many who are wrestling with the monthly burden of renting a roof to cover their heads. But this isn’t a carefully engineered phenomenon and it comes back to the factors that have made building and operating an apartment complex of any size expensive.
Developers and owners, who need to build something at first, refinance it within a few years (because real estate investors regularly flip loans, frequently interest-only because they pull off the cash that would have gone to principle as working income), have backers. There has to be sufficient return, or no one puts up the capital in the first place.
Because of the costs of development and the need to make profit, the approach was to build higher-end properties for people who could pay more. And then, the building would happen in areas where there was also a possibility of continued increases of rent to make those plans work over time.
The result was that the excess in construction credited with putting some brakes on rent increases was largely a surplus of supply for the smaller portion of the population that is well-off. They are getting to see lower rents, whether in obvious absolute cash at the start of a lease or through concessions, like rent-free months, that have the same effect.