After US rent prices took a hit in 2020, the nation’s rental market has bounced back sharply supported by four main factors namely the rebound of national mobility, the rent-versus-own arbitrage, increasing funds participation, and the wage increases in certain lower-paid industries.

US Rent Prices Are Rising At The Fastest Pace Since At Least 2015

Since a few months, one of the key developments in the US housing market has been the rebound of rent prices. Several indexes pointed to a sharp increase. According to Apartment List, the median national rent climbed 9.2% in the first half of 2021. On a YoY basis, the median national rent rose 8.4% in June (the largest increase since the firm tracked data and up from 5.6% in May). Even though some part of the increase reflects a bounce-back in prices that fell earlier in the pandemic, the real-estate firm highlights that rents are now higher than if they had stayed on their pre-Covid trend.

The same pattern has been observed with other indexes. Zillow report highlights “Rent growth maintained widespread momentum in June, with the Zillow Observed Rent Index (ZORI) up 1.8% month over month, pushing typical U.S. rents to $1,799/month in June. A strong recovery in the rental market over the past few months pushed year-over-year rent growth up 7.1% — the largest annual increase in the series’ history reaching back to 2015.” 

In the meantime, according to Rick Palacios Jr. (Director of Research at John Burns Real Estate Consulting), “rental demand for single-family homes remains extremely strong. His firm’s index shows new lease rents for single-family homes up 6% Y/Y nationally in May. Moreover, they now expect rents to accelerate 9% for the year in 2021, up from its previous forecast of 6.5%.” The firm calculates single-family rents in 63 major markets across the country.

Among other alternatives measures, as Bill McBride noted, one of the largest institutional holders of single-family rental properties publishes rent prices on a monthly basis. Invitation Homes, which owns about 80,330 single-family homes, pointed to a sharp acceleration in rental increases, especially for new leases.

Four Main Factors Have Supported US Rent Prices This Year

1- The Rebound Of National Mobility

The Covid-19 pandemic, with the associated lockdowns, has produced unprecedented restrictions on movement leading to a collapse of mobility. As a result, applications for rental homes fell sharply early in the pandemic and have then rebounded. Ongoing reopening will allow millions of people to move again. Among them, younger people, who stayed with their parents, are likely to leave and apply for rental homes, adding pressure on rents.

2- Elevated Housing Prices Have Squeezed First-Time Buyers

In the meantime, housing prices rose most in decades. The S&P CoreLogic Case-Shiller index of national property values — the main benchmark — climbed 14.59% YoY in April, the biggest gain in data going back to 1988. The trend is likely to strengthen in May according to Zillow, which expects a jump of 16.2% YoY. The acceleration would be coherent with recent data from CoreLogic and Black Knight. In this context, the violent spike of housing prices for existing home sales (and also new home sales) has resulted in falling affordability and has squeezed a lot of first-time buyers out of the market. The latter are forced to rent rather than buy a home as suggested by the chart below.

3- Funds Arrival Has Pushed Rent Prices Higher

One of the game-changers in the rental market has been the increasing participation of funds. As an example, the Wall Street Journal reported in April that an investment firm won a bidding war to purchase an entire neighborhood worth of single-family homes in Conroe, Texas. More recently, Bloomberg reported Blackstone Group Inc.’s agreed to buy Home Partners of America Inc., a rental company that owns more than 17,000 houses for $6 Billion. It confirms funds’ appetite for rental market. In this context, Federal Reserve Bank of Dallas President Robert Kaplan flagged that the housing market is overheating. He noted “we’re hearing more and more that the winning bidder for many of these single-family homes isn’t a family: It’s a fund of some type, not domiciled in our district, buying sight-unseen and planning to rent it. More and more families are being squeezed out of purchasing a home, particularly first-time home buyers and across at-risk communities. This is having ripple effects, in terms of higher rents and higher property taxes.”

4- Wage Increases In Certain Lower-Paid Industries Contributed To The Jump Of Rent Prices

In a very interesting column for Bloomberg, Conor Sen also examined the factors behind the revival of the rental market. He noted that a key factor “is the speed of wage increases in certain lower-paid service industries as companies like Amazon.com Inc., Chipotle Mexican Grill Inc., and Costco Wholesale Corp. engages in an arms race to staff warehouses, restaurants, and big-box stores. While it won’t affect luxury apartments in New York or San Francisco, the higher wages will empower landlords to raise rents, particularly in metro areas that are housing-constrained.“