Housing affordability was a growing concern before the pandemic. But low interest rates coupled with a major housing shortage have pushed home prices and real estate appreciation to all-time highs. A recent analysis by Freddie Mac (OTCMKTS: FMCC) stated the United States needed just under 4 million homes to meet demand. Despite developers' best efforts, the lack of inventory will continue to push home prices up and delay homeownership for a number of Americans. This means those who cannot afford to participate in this market will be forced to rent for the near future.
Are landlords rolling in the dough?
This may seem like good news for landlords, but high prices also mean rental returns are tighter. ATTOM Data Solutions conducted a study across 389 counties in the United States and found the average gross rental yield, or annualized gross rent income divided by the median purchase price of single-family homes, for 2020 was 8.4%, a 0.2% decrease from the 2019 average.
In addition, prices are rising faster than rents in 59% of the counties surveyed. Profit trends are shifting in favor of high-rent counties compared to lower-rent counties, largely because there's more room for return despite higher prices.
But there is a tipping point. Some of the largest metro areas, including Los Angeles and its surrounding counties, New York, and Nashville, Tennessee and its surrounding counties, have the lowest rental returns but are also home to some of the expensive real estate in the country.
Long-term demand is likely
A 0.2% year-over-year decrease is hardly something to be concerned with, but it is something for landlords to keep an eye on. Considering that wages are rising higher than rents in 53% of markets and prices are rising faster than wages in 61% of markets, long-term affordability for homeowners and tenants is a growing concern.
A shortage of 4 million homes will not be rectified overnight. It could take years to potentially decades to balance out the supply and demand in the housing market, meaning this trend will likely continue. If prices continue to trend upward, there could be continued pressure on rental returns, especially in high-cost areas, but this trend will hopefully provide long-term demand for landlords and their rental properties.
The Millionacres bottom line
Right now, some landlords are under financial stress despite higher demand for rental rates because of continued eviction moratoriums and shifts in demand. This is a challenge that should be alleviated with time and as the economy recovers, but there are still a great number of tenants who are unqualified to rent because of a lack of income. This could lead to higher vacancy rates before rental rates increase again.