The real estate market has been on a tear since COVID-19. Supply remains low, and high demand from low interest rates and job flexibility, among other factors, has led to steady increases in listing prices. Sales prices are up year over year in almost every market across the country, with the exception of a few notable metropolitan areas. While there has been plenty of talk about these residential sales lately, we would be remiss in not discussing the impact of this seller's market on rentals.
You might think booming house sales would lead to apartment vacancies, but statistics are telling us another story. Apartment renters seem to be staying put as home affordability declines. Here’s what the stats are saying and why we may have reached a stumbling block in home prices.
Home affordability is at question
The median sales price across the United States has risen 16.9% year over year, making the same $320,000 house a year ago worth $374,080 today. That extra $54,080 in a single year more than surpasses the difference in low interest rates, pricing many would-be homebuyers out of the market.
This is especially pronounced when looking at home affordability. The National Association of Home Builders housing opportunity index compares the percentage of new and existing home sales in an area to the local median income. For the first quarter of 2021, 63.1% of homes sold in the United States were considered affordable. This is down slightly from last year and significantly from a decade ago, when 78.8% of homes were affordable.
Renewals are becoming more appealing
The rent-to-income ratio is 0.34 for the United States overall, which is higher than the sales price-to-income ratio of 0.22. To some, this would indicate that more renters should be moving into homes from an affordability perspective.
Yet vacancy rates have only increased 0.8% from last year when the pandemic lockdowns were instituted, currently sitting at 6.8%. This is down from years past, where vacancies were 7.8% in 2017, for example.
The rub comes from the skyrocketing prices of homes. When compared to the retail sales prices, rental rates seem like a safe haven. The median rental rate for the United States has only increased 1.1% year over year. This is a pittance compared to the increase in the median sales price of 16.9% over the same time frame.
How does this impact investors?
Concerns over moving during a global health pandemic may have initially kept tenants in place. But COVID-19 has become a secondary concern, not the driving force. It seems that while there certainly is a booming market in home sales, not everyone can afford the prices.
Landlords should expect renewal requests and have a plan in place, such as a formal lease renewal offer. Renewals are welcomed by most investors in the rental world because they mean less vacancy and lower turnover costs, but they also mean less of an opportunity to increase rental rates if you're currently below market rents.
Unless there is a significant shift in home sale prices, this will be a long-term trend, with apartment renters staying in the rental market rather than transitioning into homebuyers.