The collapse of the U.S. rental market is just around the corner, some real estate experts warn.
Rental prices finally dropped to pre-pandemic levels last month after millions of Americans struggled to keep up with skyrocketing housing costs since the start of the pandemic.
In a series of recent tweets, Nick Gerli, the CEO & Founder of Reventure Consulting, predicted that the rental apartment market may face a downturn.
One of the primary reasons for a potential bust is the increase in the supply of rental properties is due to a recent surge in construction, which has led to a greater supply for renters.
The housing shortages caused by the pandemic, combined with fewer affordable homes to purchase, pushed many Americans into the rental market, leading builders to go on a multi-family unit housing boom.
“Apartment builders are going crazy right now. 1.1 Million apartment units currently in construction/permitting. 60% higher than pre-pandemic. Double peak set in 2007 Bubble. Bad news for Real Estate Investors. Means lower rents are coming,” wrote Gerli.
Meanwhile, RealPage Market Analytics reported that approximately 917,000 apartments were being developed nationwide in 2022, which will eventually increase the existing apartment base by 4.9 percent.
The construction boom is the largest since the early 1970s and has pressured landlords to keep their rent prices competitive to attract new tenants.
The American Housing Survey estimated that about half of rental households spent $1,000 or more monthly on rent in 2021.
Monthly payments for apartments rose slightly in March, up only up 2.6 percent from the same month last year, CNBC reported.
Apartment List reported that this was the smallest annual increase since April 2021, with housing price growth falling below the pre-pandemic average of 2.8 percent after reaching historically high levels last year.
The recent surge in available apartments may further expose the market to the vulnerability of a real estate bubble, said Gerli, as the increase in the construction of rentals has caused prices to fall nationwide.
“What’s especially concerning for real estate investors is that they’re already dealing with lots of empty apartments. Take Phoenix, for example. Data from Apartmentlist shows the vacancy rate has surged up to 7.2%. Highest level in at least six years.”
“Las Vegas is another. Vacancy Rate has more than tripled from 2.5% to 8.3% in less than two years. Rents have already started to go down in these markets,” he noted.
Another reason for the increase in rental vacancy rates is that the pandemic era halts on tenant evictions and the end of COVID monetary aid packages, have caused those unable to pay their rents to be forced out in ever-increasing numbers.
“Lots of metros in America have now surpassed their pre-pandemic eviction levels. Take Jacksonville, for example. Turns out the moratoriums/free money was just a band aid,” explained Gerli.
“So you combine evictions, with lots of building, with a Recession or near Recession, and you have problems brewing in the Rental Market. Which will invariably spill over in to the Housing Market. Because declining rents will eventually translate into declining prices,” he said.
Moody’s Analytics predicted that market growth will taper off in the second half of 2023, as home financing costs decline, due to the expectation that the Fed will move away from continued borrowing rate hikes if inflation starts to come down, taking some pressure off the mortgage market.
Gerli also noted that the shifts in the rental market are occurring alongside a major decline in demand for single-family homes, as the number of mortgage applications last month hit their lowest level in 28 years.
He added that theoretically, “lower homebuyer demand should mean more demand to rent. But that’s NOT happening.”
The real estate analyst warned that demand in both purchases and rentals is declining, which suggests that a more serious housing recession in the United States is taking place, unaffected by the effect of the Federal Reserve’s interest rate hikes and rising mortgage rates on the housing markets.
Gerli explained that he came to his findings by comparing recent data measuring the cost to buy versus the cost to rent. He also explained that as it becomes more expensive to buy than to rent, the more exposed a metropolitan region is to a housing crash.
He looked at metro areas like Seattle, where it costs 110 percent more to buy than rent, along with similarly affected cities like San Jose, San Francisco, Austin, Salt Lake, Los Angles, Portland, Provo, and Denver, saying that those cities will not see any meaningful housing recovery, until the cost to buy falls dramatically.
“Ultimately, the trends in [the] rental market suggest [the] broader housing market will continue to crash, based on: -huge construction backlog -increasing vacancy rates -lower rents – increasing gap between buy v rent cost,” concluded Gerli.
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