How the economy controls rental prices

Every year, people ask the same question: why does rent keep getting higher?  The answer is complicated, but there are some contributors that can be highlighted.

Will prices go down anytime soon?  To answer that question, the following concepts need to be considered.

Seller's Market

Things may finally be starting to turn.  For the past few years, prices and home values rose at unprecedented rates.  This meant that those who were selling their homes were in a strong negotiating position when it came to price.  Even though the market is showing signs of turning, sellers still hold some power.

Buyers, on the other hand, are in a weaker position. There's an increased demand for homes but not enough supply to meet it (or enough affordable housing supply).  That means home prices get bid up higher than they otherwise would — and when the housing market goes up, landlords can raise rental prices as well.

Renter's Market

You've probably heard the term "renter's market."  It refers to a situation where it's harder for landlords to find tenants, and they have to lower their prices in order to fill their properties.  In the early 2010s, this meant that many renters were able to negotiate lower monthly payments or better amenities at the same cost.

Fast-forward a few years, and we're now in an environment where landlords have high demand and low vacancy rates — and thus higher rents!  The result?  Rent prices are on the rise across much of America.

In other words, when combined with the housing market, it is a perfect time for landlords to take advantage.  Houses are too expensive, meaning more people are looking to rent.  With more renters and less inventory, prices are soaring.

Expensive Areas Getting More Expensive

The rent prices in expensive areas are increasing even more rapidly.  The most expensive areas are usually the most desirable, so people who live there tend to be high earners who can afford to pay more for their homes.  There's an influx of people moving into areas like Miami and Dallas because of job opportunities — and when everyone moves into an area at the same time, it becomes more congested and thus more expensive for everyone else.

The rising cost of living has meant that fewer Americans can afford the basics they need: housing, food, and health care.  But those who do have enough income aren't necessarily going on extravagant shopping sprees; they're just buying necessities like food as prices are becoming increasingly unaffordable, even for those households earning above average incomes.

High Construction Prices

One of the major contributors to rising rent prices has been a rapid increase in construction costs.  In fact, these costs have risen faster than inflation, wages, and even rents themselves.  Construction costs have increased by double-digit percentages the last decade, which gets passed on to the buyers and renters.

The average price to build a home is now $282,299 — and that's just for a simple two-bedroom house.  In some areas like New York and Los Angeles, where land is scarce and densely populated with people who want homes close together (think Manhattan), these prices can easily reach millions of dollars.

Will Prices Drop?

Things likely won't change unless there is a major shift in the housing market.  The primary reason for this has to do with supply and demand — how many rentals are available relative to how many people want them.  During the last few decades, cities saw an influx of residents looking for affordable housing options while simultaneously experiencing increased demand as Millennials started families or graduated college without jobs lined up yet.

These two factors meant that developers had no choice but to build new units at higher prices because they knew someone would pay whatever was asked for them.  During periods when economic conditions were favorable, prices have risen accordingly as supply hasn't kept up with demand.

For prices to drop, there are two things that could realistically happen.  The first is for property management companies to get more business.  If they run more rentals, their prices can actually go down per apartment they serve.  That savings could be passed on to tenants.

The second possibility is for there to be more affordable homes built.  This would mean more available apartments, which, if drastic enough, could lead to lower prices.  Unfortunately, this storm does not seem likely anytime soon, so if you are looking to rent, it may be best to lock in a price now.

Image: Pexels.

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