The Long Term Effect of Rising Rent Prices

Educational

Aug 4

Rent prices have been steadily increasing across the United States for the past decade. This rise in rent poses serious economic challenges for renters and has long-term implications for housing affordability. In this blog post, we will examine the key drivers behind rising rents, who is most affected, and what the long-term outlook could be if rents continue to climb faster than incomes.

What's Behind the Rise in Rents?

Rents have historically risen around 2-3% annually, in line with overall inflation. However, since 2010 rents have been increasing 3-5% each year, more than double the rate of inflation. There are several key factors at play:

Limited housing supply. Construction of new rental housing units slowed dramatically during the 2008 recession. Builders have been slow to add inventory despite rising demand. This shortage of supply is enabling landlords to charge higher rents.
Increased demand. The Great Recession also led to a rise in foreclosures, forcing many people from homeownership into the rental market. Millennials coming of age and forming new households has also boosted demand for rentals. This influx of new renters has not been met with a comparable increase in rental units.
Higher construction and labor costs. Construction costs are up due to rising land prices, increased regulatory requirements, and a shortage of skilled labor. These higher costs make new construction more expensive, limiting supply. Landlords pass along these costs in the form of higher rents.
Urbanization and job growth. Younger adults have been increasingly drawn to urban areas, driving up rents in cities. Thriving job markets in cities like Seattle and Austin have attracted new residents faster than housing can accommodate them. The imbalance between jobs and housing pushes rents up.

Who's Most Affected by Rising Rents?

Rising rents are felt most acutely by low- and middle-income renters. With wages failing to keep pace with rent increases, these households are being squeezed financially.

Young renters starting out are having an increasingly difficult time affording a place to live. Saving for a down payment on a home is nearly impossible when nearly half of your income goes toward rent. This delays other major milestones like getting married, having children, and accumulating retirement savings.
Low-income households have few options when rents rise. Housing vouchers rarely cover the full rent amount. Many are forced into substandard living conditions or even homelessness. Senior citizens on fixed incomes also struggle when rents outpace annual cost of living adjustments to Social Security.
Of course, rising rents also affect landlords. While property owners benefit from higher rental yields, exploding property values also drive up property taxes and insurance. Higher maintenance and management costs eat into profits as well. Like buyers, landlords also face higher borrowing costs when refinancing or purchasing new rental units.

The Long-Term Outlook if Rents Keep Rising

If current trends continue and rents keep rising faster than wages, the implications are worrisome:

Further constraints on housing affordability. High rents will lock more households into cost-burdened situations. This not only affects their quality of life but also constrains consumer spending and drags on the broader economy.
Delayed homeownership. Saving for a down payment will become more difficult. Deferred homeownership has social implications for household formation and wealth creation.
A tighter rental market. Investors may be tempted to pull units off the rental market for more lucrative uses or to capture price appreciation. This tightens supply in areas already experiencing shortages.
Social and political strife. Housing affordability is already a hot topic today. If left unaddressed, steady rent increases could boil over and become an explosive national issue.

Conclusion

While rising rents benefit some Americans, the overall long-term prognosis is grim if rents are allowed to continue spiraling out of control. Letting markets alone solve the problem does not appear to be working. If inaction persists, the social, economic, and political consequences could be severe.

Policymakers at all levels of government need to pursue solutions to promote housing affordability. Streamlining regulations and fees to enable faster construction is one component. Rental and zoning laws also need reformed to allow for more diverse housing options like duplexes and multi-family units. Expanding housing choice vouchers and enacting rent stabilization policies could also help.

The rise in rents over the past decade has already impacted millions of households. With rents projected to keep rising faster than wages, this trend is unsustainable. Now is the time to address housing affordability before the problem becomes a full-blown crisis. Affordable rentals are essential for economic prosperity and social equity. Policymakers, developers, and community leaders must work together to steer the U.S. rental market toward a more balanced long-term trajectory.