Redfin’s November rent report is out, showing that median rent prices declined by 2.1% year over year. This is the biggest decline since 2020, and renters nationwide will breathe a sigh of relief. Landlords and investors? Perhaps not so much, although there are regional variations that are worth exploring if you’re planning on investing in real estate in 2024.
Asking rent prices have been dropping steadily since May 2022, when the median U.S. rental price shot up to above $2,000 per month. At that point, rents were growing at a monstrous rate of 15% year over year as a result of the pandemic-induced scarcity of available rental homes.
The situation now is very different. The severe supply-demand gap has been steadily closing over the past year and a half, with new construction boosting supply—to the point where some landlords have been struggling to find tenants and offering rental concessions such as the first month rent-free or free parking. The rental vacancy rate rose to 6.6% in the third quarter of 2023, the highest level since the first quarter of 2021, which was during the era of COVID pandemic restrictions.
More Renters, Lower Rents
The apartment building sector is gaining momentum. New construction of apartment buildings rose by 7% year over year in the third quarter of 2023 to a seasonally adjusted rate of 1.2 million. This is the highest rate in the past 30 years. New construction starts in the sector are declining somewhat, falling 26.2% year over year in the third quarter, but the overall rate of new starts that have just begun is still historically high, standing at 1.2 million.
Redfin chief economist Daryl Fairweather interprets the data as a sign that ‘‘rents have started falling in a meaningful way. Rising supply […] means renters have more good options to choose from.’’
Rising supply isn’t the only reason why rents are falling. There are larger socioeconomic factors at play. The biggest one is, of course, the nationwide shift toward renting as a longer-term option as homeownership becomes less and less affordable.
Currently, 1 in 3 people in the U.S. are renters; they rent for longer than before and are older than ever before. This trend toward longer-term renting is changing the status of renting from the short-term stopgap option before homeownership to more of a valid lifestyle choice. Fairweather says that ‘’with homeownership so expensive, renting has started to lose its stigma.’’
The ongoing uncertainty about the economy is also contributing to declining rents. People are becoming more cautious about spending and a little more conservative about what they consider a reasonable amount to spend on rent than they were even a year ago.
What Does This Mean for Real Estate Investors?
If you’re a real estate investor and these trends are making you nervous, there is a silver lining: The rental market is not uniform, and apartment buildings represent only one segment of it. While this segment is currently on a downward trajectory, Redfin predicts that 2024 will be a good year for the single-family home segment of the rental market. That’s because there aren’t as many single-family homes available to rent, while demand for this type of rental is growing.
This growth is driven mainly by millennial renters, many of whom are still priced out of homeownership but have a real need for more spacious family housing as they start and grow families. Family homes are also popular rental options for millennials who prefer working from home and sharing a house with friends.
As an investor, you should also consider the ever-prevalent regional differences in the rental market. While rental prices are declining overall, they are steadily growing in the Midwest. Rental prices in this region climbed a very healthy 4.6% year over year to an average of $1,434. Parts of the Midwest are experiencing something of a housing boom, with many renters attracted by the overall affordability of the region.
It’s a very simple pattern: As the economic outlook worsens and people become more aware of their spending, they look for cheaper areas to live. This migration causes rental prices to rise in the now-popular region, while the expensive areas experiencing the exodus see falling prices. Currently, all other U.S. regions are seeing these declines, following years of unprecedented rent increases during the pandemic.
Want to know the one place you should be looking at as a real estate investor right now? It’s Milwaukee. This Midwestern city is seeing a robust demand for affordable rentals, partly in response to the increasing unaffordability of homeownership. Owning a unit here is a sure bet, according to local Redfin real estate agent Keisha Tally: “Every time one of my own units goes vacant, I get a ton of applicants.”
Identifying locally booming markets is a must for any investor right now, as these will continue offering opportunities for a reliable rental income in 2024 and beyond.