RENT INFLATION
Rising Housing Markets Present Opportunity
2021 has been a tough year for renters across the nation. Higher than average demand coupled with a decreasing supply have caused a spike in rents of more than 10% throughout the year. This environment provides an excellent opportunity to profit from real estate lending as investors look to capitalize on housing.
Rents Exploded Across the U.S.
Rent costs have exploded across the country. In 2021, the average year-over-year growth in median asking rents for 0-2 bedrooms properties was 10.1%, across the 50 largest US metro areas. The month of December 2021 marked the sixth month in a row where rent year-over-year growth has reached double digits and it also marks the current peak with 19.3% growth. See chart “U.S. Median Rent Development Year-over-Year” for details.
Florida is home to four of the top seven metro areas for year-over-year rent increases. In December 2021, rents in Miami (+50%), Tampa (+35%), Orlando (+34%), and Jacksonville (+29%) increased dramatically compared to December 2020. Other metro areas with significant rent increases were Las Vegas, NV (+30%), Memphis, TN (+29%), and San Diego, CA (+29%), according to a Realtor.com analysis.
Drivers Causing Rent to Spike
Experts say many factors are responsible for the sudden rise in rents. A nationwide shortage of affordable housing, extremely low rental vacancies and increasing demand as young adults continue to enter an already crowded housing market are all driving considerations.
At the end of 2021, the U.S. rental vacancy rate dropped to 5.6%, the lowest level since 1984. The last peak at 11.1% occurred in mid-2009. Since then, vacancy rates have been falling continuously as the younger generations have pushed into the housing market. The last low of 5.7% was reached at the beginning of the COVID-19 pandemic and was followed by a brief period of recovery before falling again.
Inflation and Rents
Rising rents are an increasing driver of high inflation that has become one of the nation's top economic problems. In January 2022, the rate of inflation rose to 7.5%. While gasoline and used cars and trucks remain the top two drivers of inflation, their growth rates of over 40% each represent outliers in the data. The price of shelter increased by 4.4%, which is in line with most other categories, according to the U.S. Bureau of Labor Statistics. Note that shelter also includes the price of new homes, in addition to the cost of renting a home.
It is very likely that the cost of rental units will continue to rise throughout 2022. Without rental vacancies in the market, landlords have significant pricing power and will look to capitalize on the movements within the rental industry. In fact, with forecasts predicting this trend to continue, landlords and investors in rental properties will look to ride this wave of increased rents versus cost of ownership investment and reap the rewards of constant rental demands. This is an enviable situation to be in as other investment strategies will be hard pressed to keep up while inflation balloons across the country. Additionally, with city moratorium mandates largely in the rearview mirror, rent collections have smoothed out and again have become a consistent monthly return for an investment.
What Does it Mean for Investors?
In the light of the international affairs unfolding in Europe, inflation concerns and domestic political uncertainties, stock markets and cryptocurrencies have tumbled significantly again demonstrating the unpredictable and volatile nature of commodity trading. In contrast, the U.S. rental market currently provides a stable and reliable source of return as rents are expected to continue growing in 2022.
Investors seeking for ways to participate in the rental market without the overhead of management are increasingly looking again at first deed lending. Real estate lending is an attractive and easy way to invest while mitigating the concerns of market volatility. Safeguard Capital Partners specializes in first deed trust investments with a year over year positive rate of return for our client base going back to the last decade. Those positioned to capitalize on this rising market now have the greatest opportunity to invest on the rise rather than trying to fight their way in at the peak.
