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Rental Costs Are About to Takeoff

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We are often asked whether it is better to rent or buy in the current housing market. The answer to that question is: “It all depends”. There are certain situations where renting short term probably makes sense. It may make sense if you are retiring to a different region of the country and are not yet sure where you want to set down roots for the next 25 years. It may make sense if you have a one year employment contract which will probably require a move to another place upon termination.

However, in most other cases, renting right now makes little sense for several reasons.

Let’s take a closer look at the last reason. We have often said that the cost of anything is based on supply and demand. The number of widgets for sale and the number of widget buyers together create the price for widgets. That will also apply to rents. There is a much larger demand for rentals right now. The economy has forced many to leave their foreclosed homes and other buyers are afraid to plunge into homeownership.

At the same time, the supply of rentals is rapidly decreasing. Here is a graph from Calculated Risk showing the apartment vacancy rate in the United States:

When supply is rapidly decreasing and demand is quickly increasing, prices have only one place to go – and that is UP! That is exactly where rental prices are headed.

Bottom Line

Is now a good time to rent? We think not. You can buy a home today at a discounted price and get a 30 year mortgage at a historically low interest rate. You can set your housing expense for the next thirty years. On the other hand, rental costs are poised to increase for years to come.

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33 Responses to “Rental Costs Are About to Takeoff”

  1. Marvin April 10, 2011 at 9:47 am # Reply

    This write up does not pass the sniff test.

    Real estate is in a depression not a boom. Real estate prices are deflating fast. Lower real estate prices = lower rents not higher. In North Jersey renters, and empty houses is forcing down the rental and sale prices. Its pretty obvious see all these empty properties that cant be sold will be rented causing a flood of rentals..

    The owners who are trying to rent high priced bubble properties are not getting the rent they are asking for and are likely to default on the prosperities they are unable to rent – contributing to more defaults, vacancies and more rentals.

    Property owners and banks are sitting on a huge inventory of empty houses they cant sell. The next logical step is to rent them out for a low price to get some sort of income return on the disaster they created.

    Check your local rental prices as I have and you will find rental prices are falling along with sale prices.. Several properties I was keeping an eye on to purchase are now showing up as rentals.

    Landlords will eventually face reality and lower there price. The prices will revert to the pre bubble 2002 or 1996 level of rents and sale prices here in the north east. There are exceptions in places like Las Vegas – but they are exceptions where buying is a better deal since prices are back to 2002 levels of 50% below the bubble prices. North Jersey is not there yet.

    This market is moving in one direction – down. Research other than the current month for your location is worthless as are generalities.

    The 92 million baby boomers are done buying homes. The kids have left home and they are dumping real estate and downsizing. They are saving for retirement. The bubble is over for them. Boomers generation is far bigger generation than the preceding generation and the generation that is following them.

    Where is the demand going to come from?

  2. Bill Danos April 11, 2011 at 9:47 am # Reply

    I don’t think anyone is sugesting that real estate is in a boom, but it does seem to many that certain markets present a good investment opportunity.The Wall Street Journal (http://goo.gl/2XO4W) and Fortune magazine (http://goo.gl/DsqGh) to name just a couple.

    Here in Howard County Maryland, 2010 posted an average sales price increase over 2009 of more than 3%, and there is a shortage of rental inventory. There are many being relocated to our area due to BRAC and Cyber Command. Location, Location, Location still holds true even in this market, so talk to your local real estate agent.

  3. edenjordan April 11, 2011 at 3:33 pm # Reply

    Real Estate is local, in my local market rents are rising and we have a huge demand for the inexpensive housing…under 250K. If the schools are good, and the neighborhoods are stable the rents are rising…we in Clay County Florida are seeing a shortage in rentals too!

  4. James April 13, 2011 at 5:40 pm # Reply

    Location is everything in the rental market. All of our rentals are in high demand and we have learned not to buy in certain areas. The key to success in this business is to know where to invest and what areas to avoid. :))

  5. John May 6, 2011 at 7:13 pm # Reply

    I am a Realtor here in Chicago in the heart of the city. Rent is definitely on it’s way up especially if the home property is well maintained and managed. You can rent out an apartment in less then a week in the city. There is plenty of inventory for sale, but not if you want the ready to move in place that doesn’t need work.

    If you go to the depressed areas that just started gentrification during the boom, you will find a lot of empty worthless homes. The other areas you can see a stabilization of prices throughout the city and suburbs.

  6. Debi Nobrega May 28, 2011 at 4:39 pm # Reply

    Just like listening to a National Weather Forecast, it doesn’t make sense to make decisions based on National or even State wide statistics. Best to research the actual immediate area you are planning to settle into. Only then can you make a determination as to how that particular market is doing. There are several websites available and checking with a reputable local Realtor is always a good way to get your finger on the pulse. Some areas are doing better than others. Economy 101: location, location, location and supply and demand.

    Debi

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