Story at a glance
- Rental prices have fallen from their peak in February, but leases remain high, and experts say tenants who have moved or recently renovated have seen significant increases.
- The national mortgage rate hit nearly 7 percent last week, its highest level in 16 years and more than double the mortgage rate seen last year.
- The rise in mortgage rates is making home prices too expensive for some and forcing potential buyers back into the rental market.
Sky-high mortgage rates are driving first-time homebuyers out of the housing market and back into the rental market after several big rate hikes from the Federal Reserve this year.
The phenomenon is exacerbating a rental market that is already suffering from a supply crunch, and experts say is growing well above pre-pandemic levels.
Rental prices have fallen from their peak in February, but leases remain high, and experts say tenants who have moved or recently renovated have seen significant increases.
The national mortgage rate hit nearly 7 percent last week, its highest level in 16 years and more than double the mortgage rate seen last year.
Experts including Fed Chairman Jerome Powell expect interest rates to rise further in order to “make a correction” before house prices are within reach once again.
Experts told The Hill that interest rate increases are already slowing what has been an overheated housing market. But the rise in mortgage rates is making homes too expensive for some and forcing potential buyers back into the rental market.
“Rising mortgage rates keep pressure on the rental market with many potential first-time homebuyers pushed to the sidelines due to affordability concerns,” Orphe Divounguy, chief economist at Zillow Real Estate, told The Hill.
“With fewer tenants leaving the rental market for home ownership, vacancy rates remain low, keeping rental prices fairly high. Tenants who have had to move recently or have had to renew their lease have likely seen significant rent increases,” Devonjoy added.
Annual rent growth is currently double pre-pandemic levels at 12.3 percent. Devonji noted that before the pandemic, growth was 4 to 5 percent per year. A panel of Zillow experts in late September predicted that Rentals will outperform Inflation, stocks and home values over the next 12 months.
Rob Warnock, a senior researcher at Apartment List, told The Hill that the rental and housing markets are closely related because prices and rents tend to move in line with each other.
Warnock explained that there is a dearth of historical examples where house prices fall or rents rise or vice versa.
He said, “When housing demand is in demand… I don’t think it bifurcates much, even if we look at other periods when price changes were really dramatic.”
Although the housing market has cooled, rates in each sector are much higher than they were before the coronavirus pandemic. Rental demand – the list of rental prices – for the first time in 20 months from July to August – fell 0.1 percent.
The typical monthly rent in September was $2,084 while the typical home value was $356,026, According to Zillow. The price of a typical home in the United States increased by more than 16 percent from the previous year.
Jimmy Woodwell, vice president of research and economics at the Mortgage Bankers Association, said on-site rents — where tenants are already in a lease — are the focus of federal inflation action rather than demand rents. Woodwell explained that the moderation in rent demand that has risen over the past two years means there is still a “fair delta” between rents in place and rent demand.
So, what that probably means is that we’re starting to see this moderation in rent demand. “There may still be a reasonable amount of rent growth in place before it catches up with the rent demand growth that we’ve seen over the past couple of years,” Woodwill said.
Meanwhile, Woodwell noted, vacancy rates are the lowest in decades. The tightening, he said, was caused by a decade of under construction in the wake of the global financial crisis in 2008, which occurred when millennials came of age, forming families and creating increased demand for housing.
But experts say this increased demand has prompted builders to ramp up production of multi-family units, sending housing starts to a multi-family high in years with nearly 900,000 multi-family units under construction.
“It will be a while before we see a significant improvement in rent affordability, but the increased supply will eventually boost rental vacancies and reduce pressure on rents – welcome news for tenants who have struggled through an extremely challenging rental market over the past year,” he said. Divounguy.