Renters Keep Renting as Affordability Declines

Key Highlights

• Impact of home seller’s market on rentals good for landlords/owners
• Home affordability motivates renters to stay put

The Higher Residential Prices Go, The Lower Vacancy Rates for Rentals Fall

As low for-sale inventory and high demand continue to dominate, realtor.com’s latest national forecast study predicts that existing home sales will increase +7% y/y in 2021.

Such a price prediction is great news for sellers…not so great for potential homebuyers, many of whom are renters.

Just remember that the median sales price nationwide has jumped +16.9% y/y and is far outpacing average wages by four times.

Brief & Recent History of Affordability

According to the National Association of Home Builders (NAHB), 63.1% of homes currently sold in the US have been considered affordable.

A decade ago, 78.8% of homes sold were considered affordable.

Translation: Rental Renewals More Appealing

Currently, the rent-to-income ratio stands at 0.34.  The sales price-to-income ratio stands at 0.22. Supposedly, if thinking about affordability issues, more renters should be moving into homes.

BUT, vacancy rates have increased only 0.8% from 2020 when pandemic lockdowns became our reality.

Currently, the vacancy rate stands at 6.8% and the median rental rate has risen just +1.1% y/y.

There’s no secret to understanding why rental renewals are becoming more attractive.   Just compare the +1.1% increase in the median rental rate and the +16.9% increase in the median sales price.

What Can Investors Expect and/or Prepare for?

Expect renewal requests from your current tenants.

Be ready with a formal lease renewal offer.

Most of your current tenants aren’t going anywhere fast due to continuing affordability declines.

Why?  Most industry experts expect a long-term trend of low vacancy rates and high renewal rates primarily due to escalating home prices.

Thanks to The Motley Fool’s Millionacres.

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