Although the United States has long given preferential treatment through federal and state tax income codes to encourage homeownership, its rental sector has also provided much-needed housing for tenants seeking flexibility, proximity to job centers or universities and, in more recent years, a critical option for those priced out of buying a home.
However, accompanying the rapid rise in home prices has been an increase in median rents, according to Zillow, rising 26% for multifamily units and 41% for single-family homes between January 2020 and July 2024. While part of this jump stems from tenants escaping urban areas in favor of more space in the suburbs and smaller cities, and has led to an important surge in new, single-family homes for rent, the alleged greed of larger, institutional landlords has also been widely cited. In the years ahead, with housing costs consistently listed as a primary concern of U.S. households (and voters), while limits on rent increases are popular, in the long run the cure is encouraging more housing supply to meet demand.
Renter Household Demographics
According to data assembled by the National Multi Housing Council from the Census Bureau’s 2022 American Community Survey, 35% of U.S. households rent homes including traditional apartments, townhomes, condominiums, duplexes, single-family homes and mobile homes. While nearly half of households that rent (47%) live in apartment buildings with five or more units, 31% live in single-family homes, 17% live in buildings with two to four units, and about 4% live in mobile homes. In rural areas, however, single-family homes make up as much as two-thirds of the rental housing stock.
As many renters are starting out in their careers, just under one-quarter (23%) are under age 30, but the largest share of renter households range in age from 30-44 (32%) and from 45-65 (28%), followed by those 65 and over (17%). While many of these households rent by choice, others are “renters by necessity” and would buy a home if the combination of the sales price and mortgage rate made it possible. In general, however, rental households tend to earn less than those that own their homes. In 2022, the median income for all rental households was $50,500, or 44% less than the $90,100 for home-owning households.
Cost-Burdened Renter Households and Rent Control
Due in part to the lower incomes for renter households, the rising cost of renting in recent years has hit tenants especially hard, leading to an increase in “cost-burdened households” (spending 30% or more of their income on rents) and “severely cost-burdened households” (spending more than 50%).
An analysis by the Joint Center for Housing Studies at Harvard University shows the number of cost-burdened renter households rising to a record 22.4 million in 2022, up almost 10% from 2019 levels. Even more alarming is that nearly 80% of this increase since 2019 was focused on renter households defined as severely cost burdened. A recent update from the Census Bureau for 2023 shows nearly half of renter households — 49.7% — paid more than 30% of their incomes on housing costs.
While it’s true that up to 80% of lower-income households earning under $30,000 pay over 30% and even 50% of their incomes on rent, over 40% of households with moderate incomes from $45,000 to $75,000 annually also struggle with monthly rental payments. It’s primarily due to these increasing struggles to afford rent that various forms of rent control have been passed in various cities and states, and are becoming part of the national political conversation.
According to the National Apartment Association, while 33 states preempt local governments from adopting rent control legislation, seven states and the District of Columbia currently have rent control laws in effect at the state or local level. However, given a strong connection between the national surge in homelessness and the rising cost of rental housing, some local governments are starting to push back on state restrictions and adopting their own rent control policies. Despite just 200 local governments having rent control laws in place as of 2022, this number could balloon in the years ahead if cities and counties are unable to approve or assist in providing the number of rental housing units required to catch up with pent-up demand.
Unfortunately, although rent control laws can provide immediate relief, in the long run they generally limit new development as market-rate developers (and even some affordable housing providers) will simply build elsewhere, and investors direct their dollars to other opportunities.
A 2023 study by NPD Analytics economic consultants in Washington, D.C., on rent-controlled markets showed that 71% of housing providers are reducing investments or canceling plans to develop or invest and 67% would not consider investing at all in such markets. For current owners of rental properties in rent-controlled markets, 61% have postponed or expect to defer nonessential maintenance and improvements, and 54% are more likely to consider selling their properties.
Moreover, because rent control policies are not just directed at low-income households, in many cases higher-income households can benefit, with nothing preventing them from continuing to live in rent-controlled units while investing in their own income-producing properties elsewhere.
Median Rents
Over the last year ending in July 2024, the median rent for a multifamily unit nationally rose 2.7% to $1,916. However, given the preference by many renters for single-family living, median rents for single-family homes rose 4.7% year-over-year to $2,294, or nearly 20% more.
Since the pre-pandemic days of January 2020, the median multifamily rent rose by 25.7%, while it spiked 40.9% for single-family homes. Still, the dramatic annual increases in rents noted in late 2021 and 2022 have gradually subsided, and now range nationally from about 3% to 5%.
The least affordable MSAs to find an apartment to rent include coastal regions in New York and California as well as in Hawaii, while the most affordable markets mostly include cities in the Midwest.
For single-family homes, it’s a similar story, with MSAs in Hawaii and California charging the highest rents while those in the Midwest are significantly lower.
However, news of these more affordable housing markets has also led to increases in demand, with asking rents for multifamily units in Ohio, Virginia and Missouri MSAs rising over 5% per year versus 2.7% nationally. At the same time, asking rents for MSAs in Texas, Florida and North Carolina have fallen from 2.6% to 4.6% per year.
For single-family homes for rent, the sharpest annual increases in asking rent include MSAs in Ohio, Hawaii and Indiana, rising by over 7% per year versus 4.7% nationally. Notably, the only MSAs to report declining asking rents year-over-year included Austin, Texas (-0.6%), and Cape Coral, Florida (-0.5%).
[READ: The Most Undervalued U.S. Housing Markets]
Vacancy Rates
In general, a rental market is in supply/demand equilibrium when the vacancy rate is around 5%. During the second quarter of 2024, the vacancy rate for all rental units nationally rose three-tenths of a percentage point from the same quarter of 2023 to 6.6%, suggesting a slight tenant’s market. Vacancy rates were even higher in the cities (6.9%) but lower in the suburbs (6.5%) and in rural areas (6.2%). Year-over-year, vacancy rates in the suburbs rose the most, increasing from 5.4% to 6.5%, while they fell from 7.1% to 6.9% in the cities.
However, Jay Parsons, a rental housing economist who also serves as a principal and head of Investment Strategy & Research at Madera Residential in Lubbock, Texas, suggests that any supply gluts for rental units are temporary.
“Housing supply is cyclical and it’s hard to tie that to demand, and that’s why we’re seeing market fluctuations that are going to be changing over the next year or two,” he says. “Right now we’re seeing the benefit of high supply, but that will change dramatically over the next 12 to 24 months, depending on the market.” He predicts a reversion to new supply more characteristic of early 2012 to 2014. For potential tenants, that means today’s deals may not be there for long.
If the Federal Reserve continues with its plan of reducing its federal funds interest rates as inflation subsides, that could benefit deep-pocked investors with staying power. “The ones in trouble are those which bought at the peak with short-term, floating-rate debt and rents are not as high as expected,” says Parsons. For a larger player such as Equity Residential, which recently announced the acquisition of nearly 3,600 apartment units from Blackstone, “they’re making a big bet coming back into the Sun Belt but planning on being there a long time and able to weather the storm for a couple of years.”
In terms of vacancy rates by the number of units in a structure, single-family homes have consistently shown the lowest rates due to their popularity, and averaged just 5.4% in the second quarter of 2024. Similarly, vacancy rates for buildings with five or more units (generally apartment flats) are typically higher, and averaged 7.8% in the most recent quarter.
The tightest rental markets with vacancy rates under 5% in the second quarter of 2024 included several markets in California (Sacramento, San Jose, Los Angeles and Riverside-San Bernardino), as well as Boston and Chicago. The MSAs with the highest vacancies over 10% included two in South Carolina (Charleston and Columbia), two in Florida (Cape Coral, Miami and Tampa) and Detroit.
Rental Demand
In addition to its index covering observed asking rents in various MSAs, Zillow also tracks the demand for rental units by measuring engagement (ad views and inquiries) through its Observed Renter Demand Index, otherwise referred to as ZORDI.
Although the demand index for multifamily units surged from early 2021 through mid-2022, the rise wasn’t as robust versus single-family homes. The demand index for single-detached homes surged in the first half of 2021 as COVID-19 pandemic lockdowns continued, but has since fallen and is now closer to that for multifamily units. More recently, the ZORDI index for both multifamily and single-family homes have fallen as more rental households have opted to remain in place.
In July, the hottest markets for rental demand included Honolulu, San Jose, Chicago and New York City as well as several markets in California. Alternatively, the coldest markets included several MSAs in Florida (North Port, Miami, Cape Coral and Jacksonville) and Texas (Austin, Houston San Antonio and Dallas).
For single-family detached homes for rent, the hottest markets for housing demand included several markets in the Midwest (Cleveland, Detroit, Chicago, St. Louis, Cincinnati and Omaha) as well as coastal markets in California (San Jose) and Virginia (Virginia Beach and Richmond). The coldest markets for single-family rental demand included multiple markets in Florida (Cape Coral, North Port, Miami and Jacksonville) and Texas (Austin, Houston and San Antonio) as well as New York City and Myrtle Beach, South Carolina.
Rental Unit Ownership
Over three-quarters of units in larger apartment buildings with 50 or more units are owned by institutional investors (such as partnerships, corporations and REITs), with the balance owned by smaller investors and affordable housing providers. By contrast, 70% of smaller properties including two to four units are owned by individual investors and estate trusts.
For single-family rental homes, a 2018 study by FreddieMac showed that 88% were owned by very small investors (10 units or under), 7% owned by small investors (11-50 units), 4% owned by middle-tier investors (50-2,000 homes) and 1% owned by institutions (over 2,000 units).
While it’s certainly true that larger, institutional investors have increasingly viewed single-family homes for rent as an important and growing asset class in certain markets, on a national level they still own just 3% of overall supply — most of which remains in the hands of mom and pop investors.
These investments started in earnest in the lengthy aftermath of the Great Recession, during which home prices fell, rebounded and then fell again. It was after Wall Street-backed investors began to snap up foreclosed but geographically dispersed single-family homes in bulk to rent out that a new floor was set under housing values, leading to the long recovery, which was supercharged as mortgage rates fell to generationally low levels.
With the discounted foreclosures long in the rear view mirror, but the demand for single-family rentals continuing to rise, by 2021 and 2022 several well-financed companies began buying entire communities from traditional homebuilders of ‘for sale’ housing, or creating their own communities of newly built homes for rent. Some traditional homebuilders have also launched their own divisions, focused on creating their own build-to-rent communities.
Brad Hunter, president of Hunter Housing Economics in West Palm Beach, Florida, says build-to-rent communities typically fall into three primary categories:
— Traditional, single-family detached homes on regular-sized lots
— Cottage-style homes on smaller lots that still provide a single-family living experience with no shared walls and a private outdoor space
— Townhomes, duplexes and triplexes on shared lots but without neighbors above or below
However, because these units can be difficult to track by traditional methods, Hunter says the Census Bureau often misses building permits meant for rental homes versus homes for sale. Although he says there’s “still a very strong demand for tenants, a radical pullback in capital for both debt and equity” is leading to fewer housing starts for both multifamily and build -o-rent units. “We are seeing projects right and left that are stalled and having trouble. Everything has become tougher, and all (rental housing) investments across the board look worse,” says Hunter.
According to proprietary estimates by Hunter Housing Economics linked to Census data, BTR housing starts reached a peak of nearly 124,000 units in 2023, accounting for about 13% of all single-family housing starts. However, given the pullback in funding for new projects, BTR starts are projected to fall sharply for both 2024 and 2025 before surging again in 2026. That predicted surge is partly due to a growing pent-up demand for BTR homes, which Hunter’s firm is forecasting will grow from 135,000 in 2024 to 167,000 by 2026. As a share of overall single-family housing starts, the BTR share could exceed 14% by 2026 and rise even further in later years.
Future Supply
For July, the Census Bureau estimated an annualized rate of 458,000 building permits authorized for multifamily units across the country. However, given an estimated 884,000 units under construction, plus nearly 47,000 multifamily units completed and a vacancy rate of nearly 8% in the second quarter of 2024 for buildings with five or more units, it’s likely it will be some time before multifamily building permits return to the levels of late 2021.
Nationally, annualized single-family permits were estimated at 938,000 units in July, down from well over one million in early 2024. With 670,000 units under construction, an estimated 86,500 homes completed in July and a vacancy rate of 5.4% in the second quarter of 2024, it’s probable that single-family permits for homes intended to be sold and rented will remain much higher versus pre-pandemic levels.
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Multifamily and Single-Family Rental Housing Market Trends originally appeared on usnews.com
