As the economic landscape shifts from 2022 into 2023, adjacent industries like the real estate sector experience a ripple effect. Recently, new research into how the housing market has changed in response to these economic shifts has revealed that there are several locations throughout the country where it’s now more affordable to rent a home rather than buy it outright. Here’s what that may mean for real estate professionals working in these specific markets.
According to information released by brokerage firm HouseCanary, growing inventory in select US markets has led to an easing in competition for vacancies. This runs counter to a general trend for an increase in rental prices across the country. In fact, by December of 2022, average US rental prices stood at just over $2,300, a 5 percent hike year-on-year. Yet when this figure was compared to rental prices for the first six months of 2022, average prices had actually gone down by nearly 6 percent.
The general takeaway is that, while there are some markets that are exhibiting growth in rental prices, there are many that are showing declines. For every location exhibiting large annual rent increases, such as the Indianapolis, Indiana region with a more than a 30 percent price hike, there are places like Memphis, Tennessee and Port St. Lucie, Florida, both of which saw rental prices decline by more than 5 percent. In many locations, therefore, it has become much more affordable for renters than homeowners.
One of the biggest contributors to this new trend is likely to be the ever-increasing price of home lending in the US. Thanks to the Federal Reserve’s attempts to curb the rise of inflation taking their standard form of increasing base bank interest rates, the cost of mortgage lending has grown as well. While in 2022 rates were at some of their historically lowest points ever, with every rate hike the Fed has instituted over the course of last year, there are instances of mortgages that once charged only 3 percent in interest now charging double or even more.
This trend is likely to continue for the foreseeable future. The Fed is expected to hike rates even further in February, which means that lenders will follow suit by increasing the interest rates on their own lending products accordingly. This includes mortgage products, which will, in turn, exacerbate the costs of home ownership. The end result is that renting a home is likely to become even more affordable in comparison, even in locations where rental prices haven’t necessarily decreased.
There is much to be gleaned from this information that is likely to be of interest to real estate professionals. First, the writing is on the wall when it comes to home prices. With lending becoming increasingly expensive, it’s nearly inevitable that demand for higher-priced homes is likely to slide at a more precipitous rate. Eventually, individuals looking to sell properties may discover that it has become harder and harder to find buyers willing to pay top dollar for these properties. This will necessitate sellers to decrease their asking price accordingly.
Additionally, the higher affordability of renting a home versus purchasing one is going to exert additional pressure on house sellers as well. This is especially true in locations where rental prices are falling, but less applicable in regions where rental price increases are still in effect. However, with the Fed not showing any signs of relaxing on their anti-inflation measures, it’s likely to be a matter of time before home ownership, even in these markets, becomes too expensive in comparison to renting a property instead.
So what does the future bring if these trends continue? For real estate professionals, the message is clear: you’re likely to see home sale figures declining in both volume and purchase price for the time being. At the same time, a renewed interest in rental properties may inspire some investors to seek to purchase rental properties as a better hedge against the current economic conditions, at least in certain circumstances.
Smart real estate agents will need to keep a close eye on these trends and shift their efforts accordingly to keep their business efforts agile. Focusing on rental properties in your local market is one way that is likely to pay off in the long run, though the overall uncertainty of the US economy means that, ultimately, anything can happen. This requires real estate professionals to read situations carefully and perhaps be slightly more conservative in their exposure to market-related risk.
For more directed efforts, consider whether your local markets are one of those that have exhibited the largest levels of growth or decline in rental prices. HouseCanary found that, in addition to the Indianapolis region, other locales like Charleston in South Carolina, New Haven in Connecticut, Naples and Marco Island in Florida, and Pittsburgh in Pennsylvania all saw rental prices increase by at least 23 percent. Meanwhile, the other regions where rental prices dropped included Cape Coral, Fort Meyers, Palm Bay, Melbourne, and Titusville, all in Florida, as well as Phoenix, Mesa, and Chandler, Arizona. These places saw price drops of anywhere from 2.1 percent to 5.8 percent. Preparing now for what lies ahead, whatever it may be, will keep your real estate business successful.