The current residential rental market in the United States paints a somewhat dreary picture, especially for younger people. The average rent for a residence (house/apartment/etc) in the U.S. has reached $2,052. That number is only $2 less than the all-time high in August 2022.
Renters these days are being hit with a double whammy of higher interest rates – which serve to keep renters from becoming buyers, giving landlords a captive clientele – and slow wage growth. As the average income is just a shade under $60,000 a year, the average person, without a roommate, is waving goodbye to about 40% of their pre-tax earnings just to have a roof over their heads. That figure doesn’t factor in utilities, insurance and other expenses associated with having a place to stay. This is compared to about an $890 average rent in 2005.
Several variables have played a part in why average rents have risen so much, namely:
- Lack of rental units – In many regions, the construction of new rental properties hasn’t kept pace with demand. Zoning regulations, cost of materials, and labor shortages in the construction sector have made it challenging to expand the rental inventory.
- The broader economic climate – COVID, rebounding interest rates, higher property taxes and strict lending requirements have made home ownership just a dream for many.
- Increasing urbanization – As more individuals flock to urban centers in search of employment, education, and lifestyle opportunities, demand for rental properties in these areas has skyrocketed. With limited space and growing populations, rents in major cities have seen exponential growth, pushing the national average upward.
Realistically, rents probably will not be coming back down anytime soon. Builders have found there isn’t a lot of money in mass producing apartment complexes. They tend to work more toward focusing on “luxury” units, whether that be homes or apartments, which gives them a higher profit per unit. The term “luxury” is used loosely as there is no hard and fast definition for it. Many renters end up paying luxury prices for apartments/houses which got upgraded with a little shiplap and granite countertops.
Interest rates are hovering around 7.5% (as of October 6) and landlords know they have an audience which is more captive now than they have been in the last three years.
While the national average sits at $2,052, it’s important to remember that rents vary widely across the country. Coastal cities like San Francisco, New York, and Los Angeles have traditionally seen higher rental rates due to demand and limited space. In contrast, the Midwest and the South might offer more affordable rents, with spacious properties available at prices below the national average. Work from home policies can help make areas with a lower cost of living practical for those who would otherwise need to be near where their job is located. The flip side of this is it can end up driving up rents in areas of the country which usually trends quite a bit lower than the national average.
It will be interesting to see where the average rent ends up at the end of the year. The Fed has yet to show a willingness to stop their interest rate hikes, meaning they still believe inflation is a danger, and with it, rent prices will likely continue to go rise.