Housing

‘A Major Affordability Crisis': Rents Climb as Tenants Return to Big Cities

Considering incomes are lagging further behind fast-rising mortgage costs, tenants are facing some of the highest affordability challenges in the past 15 years

Are you ready to hear a daunting statistic?

According to Bloomberg, only 23% of New Yorkers can afford the average cost of rent.

National rent growth has escalated and the national rent index is up 16% year over year, higher than the 9.1% inflation rate that the U.S. Bureau of Labor Statistics reported for June. 

In Manhattan specifically, the rent index, or commonly accepted pricing index that reflects changes in cost of living, has increased. The rate has jumped from $3,000 to $4,000 in a single year, according to Zillow senior economist Jeff Tucker.

Will rents get better or worse this year?

Tucker relayed some not-so-optimistic news about rent prices over the next few months in a conversation with LX News. 

“Unfortunately I don’t have a lot of great news in that respect, we don’t expect rents to be plummeting back down anytime soon,” Tucker said.

Why is the national rent index increasing?

People continue to swarm larger cities like New York and Los Angeles in the aftermath of the COVID-19 pandemic. While it’s exciting to see jobs returning to office, tourists starting to visit again and civilians reemerging from their socially-distant isolation, this also means that prices will be affected. 

Inventory continues to recover from the lows we saw in February, but we are still 50% below 2019 levels. Prices continue to swell as supply trails the increasing demand for housing in these cities.

Are mortgage rates making rent more expensive?

There is another huge factor affecting the rental market as well, and that is mortgage rates.  Rates have approximately doubled from this time last year from under 3% to over 5%. In layman's terms, buyers face a more expensive market without increased value. This means that renters who were going to move out actually stay put and renew their leases. 

According to Zillow, mortgage rates have increased in June, averaging 5.78%, which means a new purchase of a typical U.S. home would mean monthly mortgage payments of $2,127. This is 51% higher than it was a year ago.

How are mortgage rates affecting tenants?

“Mortgage rates took an unprecedented leap skyward over the past two weeks and quickly multiplied housing costs as they rose,” said Zillow economist Nicole Bachaud. “We are already seeing signs of waning demand, and expect these recent rate hikes to quicken the market's needed rebalancing. While shoppers will likely experience less competition for homes than the frenzied recent months, their purchasing power has dwindled.”

As a result, we are seeing fewer renters vacate their units to buy their first homes. Avoiding upgrades is almost a necessity at this point, and resorting to downsizing is something many people are considering. 

In 2022, mortgage payments are higher than rent in 45 of the 50 largest U.S. metropolitan areas, compared to 22 in 2019. A typical rent payment is more expensive than a mortgage payment, including taxes and insurance, in only five of the largest U.S. metros. 

Even though rents have increased since the start of 2021, due to the global pandemic, the rapid rise of mortgage costs still makes rent the more affordable option. 

It’s no wonder this adds pressure on the rental market and tenants.

Considering incomes are lagging further behind fast-rising mortgage costs, tenants are facing some of the highest affordability challenges in the past 15 years.

“If I had signed a lease it would be taking a lot of my savings, so I decided to move to a new building,” said Maria, a teacher from Austin, Texas. She is losing 150 square feet by doing so, a necessary decision to offset the affordability challenges posed with renting.

How are markets suffering because of these changes?

With renters less likely to vacate their units to buy homes, home values are showing a slightly slower pace of annual growth. The number decreased by 0.2% from April to May.

“Arriving in the middle of the spring selling season, this deceleration is a clear signal that buyers are dialing back their demand for homes in the face of daunting affordability challenges,” said Tucker.

How much can landlords legally increase rents?

In most of the U.S., “it’s just what the market will bear,” said Tucker. “They can basically raise rent to whatever they think would make them the most money.”

However, larger cities like Los Angeles and New York do have some restrictions, otherwise known as rent control.

Tucker suggests that people research whether it applies to your unit in your building. Though rent control mostly applies to older buildings, everything is tied to the overall rate of inflation. Therefore, even in rent controlled spaces, your rent is still most likely increasing this year, maybe just at a slower pace.

What New Yorkers can expect

A quick look at the daunting statistic that only 23% of New Yorkers can afford the average cost of rent is cause for serious concern. 

Tenants, especially if they are in rent-controlled units, will be forced out into the open market and ultimately have no choice but to move away. There is no way residents could go back and sign a new lease at today’s going rate. 

“For a family with kids, they may have to move schools if they move out and they can’t afford to sign on an apartment in the same school district,” Tucker added. “This is a major affordability crisis in this country.”

When are rents expected to go back down?

At the moment, this is a bit ambiguous. Right now it’s unclear as to what federal policymakers can do about this affordability crisis.

“In the long run, what we need is more housing,” said Tucker. “We need to go from a mindset and a level of scarce housing to fairly abundant housing.”

At the moment, we’re playing musical chairs with New York City’s extreme scarcity housing mindset. There are only about half as many vacant units listed for rent right now as there were a year ago.

“More and more residents are finding themselves without a seat and they’ve just got to go somewhere else.”