Is the Rent Bubble Finally Bursting? What You Need to Know
Coronavirus has already demonstrated its ability to not only impact our individual lives but the economy on a global scale. We’ve seen how this pandemic has influenced consumer buying habits and has caused stock prices to plummet as businesses and individuals struggle. Another area where we can see some obvious changes are within the housing market, even though homeowners, investors, landlords, developers, and real estate professionals are holding their breath to wait and see how the dust will settle.
As residents are encouraged to shelter-in-place, home showings are prohibited in many states, and lenders have changed their policies, we are shifting into a buyer’s market in many cities, yet people are unable to buy. However, people still need a place to live in. Leases will end (albeit policies in place to give people more time), and with social distancing rules still in effect, people will have to improvise and find ways to move quickly, efficiently, and cost-effectively, or continue to stay where they are.
Is it safe to assume, then, that people will be renting for a little while longer, or will they move if rental prices drop? And, are prices actually dropping yet, or will landlords take advantage by continuing to boost prices while they still can? Will the rental bubble burst, or are we just seeing a gully?
And, how do you, as a real estate agent, fit into all of this?
Searches for Rental Properties Have Dropped
According to HousingWire, the rental market has quickly seen the effects of stay-at-home orders. Citing Zumper’s National Rent Report for April, “Google search volumes for apartments for rent were down between 10% and 35% last week in its top cities, while long-term inventory dropped by about 12% last week.” This has been the trend not just across Google and larger search engines, but individual rental websites as well. RENTcafe, for example, saw a 25% decrease in website search traffic as early as mid-March.
Short-Term Rental Searches are Increasing
So, people are not searching for rental apartments as frequently as they normally would, but searches that are increasing are those in the short-term rental category. This is up 20-25% year-over-year, according to Zumper. With traveling on the decline, short-term property owners have found other ways to fill their rooms while adjusting their lease terms, as medical professionals need to quarantine away from family members, stranded travelers need a place to wait it out, and others need to escape their situation and find somewhere to stay for a few months before they make any big decisions.
Prices are Still All Over the Place
Despite this, the report indicated that on a year-over-year basis, rental prices in cities like Seattle have gone down 8.5% (though, are continuing to grow 0.5% monthly according to Apartment List’s National Rent Report), and on the east coast, monthly rental prices have gone down 5% as well. This may or may not be tied directly to the fact that these are/have been some of the hardest-hit areas from COVID-19, but we do not have enough information to formulate any conclusions, and the data we do have is not necessarily indicative of anything just yet.
While there are still many cities where rent prices are continuing to increase overall as is typical with rent prices in general (albeit the fact that this growth may be slower than usual) there are also more cities where prices are dropping. For instance, New York City, which has one of the most expensive housing markets year after year, saw the price of a one-bedroom drop 5%, whereas Fresno, CA, saw almost the exact same impact percentage, but in the opposite direction. Clearly, we cannot jump to any conclusions in terms of COVID-19’s impact.
But, Don’t Rent Usually Go Up This Time of Year, Anyway?
So, for rentals in cities that have gone up in price, well, don’t rent usually go up this time of year, anyway? Well, not necessarily. Apartment List says, “Apartment searches tick up from December to January and grow steadily to their July peak. Moves, on the other hand, begin ticking up in March and increase dramatically to their peak in August. As moves begin slowing down in the fall, rent prices tend to drop, as demand softens. For renters, moving in the “off-season” (December or January) can offer deals, while moving in peak-season (July or August) offers the best selection of rentals.”
Since many people tend to move in the summer, landlords would usually increase their rental prices as demand goes up. But, as many people now are staying in place for the foreseeable future due to COVID-19, there is a possibility that landlords will decrease rental prices as of July approaches, regardless of what normally happens this time of year.
More Competition for Lower-Cost Rents
Due to the situation, people may be holding off on moving into a new rental property altogether, and are therefore renewing their leases. Unfortunately, there may be landlords who are taking advantage of this and are increasing their rent prices regardless (despite laws that are going into effect to prevent things like this from happening).
Because of this, there will be people who are looking to move into cheaper rentals as soon as possible, especially if their jobs and income have been impacted by what’s happening. Of course, this will inherently lead to more demand among these cheap rentals, which keeps the rental market moving. Meanwhile, prices of luxury apartment rentals may also decrease to keep up with the situation and ensure that these properties don’t become vacant.
Will Investors Need to Pivot or Change Their Strategies?
Speaking of vacancies, you may also have landlords who do not want to risk having vacant properties, so they will keep rent prices the same (which is why we see rent prices flattening in major cities, too, instead of increasing or decreasing). This may carry over to other investors working on rehab and flip projects, who may want to take advantage of mortgage rates to refinance but will end up needing the cash flow from their properties to stay above water in the meantime. Of course, this will be difficult as construction and development projects are on hold. Again, it’s not clear how this will play out.
So, is the Rental Bubble Bursting or Not? And, How Can Agents Prepare?
In general, rental properties tend to always do okay when other aspects of the housing market (buying and selling of properties) suffer, as people need to live somewhere if they can’t afford their mortgage or can’t buy the home they were looking forward to purchasing. But, as with everything right now, there is still a high level of uncertainty, instability, and fear, and we can’t say for sure whether or not the rent bubble is in fact bursting.
Like with many instances in the housing market, any dramatic changes we might see will be in major cities/on the local level first. As an agent, if you want to stay on top of this, simply keep your eye on rental properties in your area to see if you notice any patterns. Are there more rental properties going on the market? Are there price cuts? If you list rental properties, are there more people getting in touch with you about those than your non-rental listings?
Whatever the case may be, it wouldn’t hurt to get some more listing properties under your belt for the time being. If not for a broker’s fee, at least for making connections and meeting other people who may reach out to you in several months once they can resume their home-buying process