Harvard’s annual rental housing report reveals a lot about the condition of the market in the U.S. This year, it unveils the cooling of the rental market and several other trends.
Annual Rental Housing Report Key Takeaways
The Joint Center for Housing Studies of Harvard University annually releases a report regarding the country’s rental housing market. The 2024 America’s Rental Housing Report has several notable trends and key takeaways.
Softening Rental Markets
According to the report, apartment growth has stalled. The rental market rapidly increased during 2021 and 2022. However, rent growth for apartments with professional management fell during the third quarter (Q3) of 2023. It dropped from 15.3% to just 0.4%.
This decline was widespread and affected most areas, regardless of geography. Only 1% of the markets reported a rent growth of 10% in Q3 of 2023. This slowing demand has stabilized the rental market after 18 months of turbulence. The deceleration is good for renters, though rental home prices are still much higher than pre-pandemic levels.
Record High Unaffordability
Despite the slowdown in rent growth, renter households are still more cost-burdened than ever due to the rental market overheating during the pandemic. Thus, there is a much greater need for rental assistance.
In 2022, a record-high number of renter households (approximately 22.4 million) spent over 30% of their income on utilities and rent. Among cost-burdened households, there were 12.1 million that consumed over half of their income. The number of cost-burdened renters has reached 50% — up by 3.2% from 2019.
Moreover, there has been a dwindling supply of low-cost rental units. Yes, many new apartments may become available according to the 2024 rental market predictions. However, they are usually high-end apartments that have a high asking price. This is unhelpful to cost-burdened renters.
According to Whitney Airgood-Obrycki, the rental housing report’s lead author and a senior research associate for the Joint Center for Housing Studies, what they are building is at the high end. This is because there has been an increase in the cost of construction. There is also a lot of demand from higher-income renters. In the last decade, most new apartments cost $1,400 monthly or higher. It’s unaffordable to a bulk of the country’s renters.
In addition, older apartments — often more affordable — require more significant investment to address several inadequacies. Some of these include climate risks and inaccessibility. Investors find these challenging given the market’s current environment, increasing operating costs, and rising interest rates.
According to the annual rental housing report, millennials, baby boomers, and the strong demand from Gen Z must ensure this slowdown doesn’t last long despite the difficult conditions.
Homelessness is at a Record High
During the pandemic, financial support was provided to those who needed it. This temporarily decreased eviction filings and provided a safety net for overburdened renters. However, these pandemic-era renter protections are slowing down, and many have expired. As a result, housing instability is rising once again. Unsurprisingly, there has been a spike in homelessness.
Roughly 653,000 people were experiencing homelessness in January 2023. That’s up by approximately 12% from the previous year. Moreover, it’s 48% higher than the homelessness rate in 2015. Harvard researchers noted that this increase is the highest single-year increase in the nation’s unhoused population record.
Income Unable to Keep Up With Rent Increases
The declining supply of apartments with low rental prices only exacerbates renters’ financial burdens. According to the annual rental housing report, only 7.2 million units had rental contracts under $600 in 2022. This maximum rent is affordable to those in the $24,000 annual income bracket. That makes up roughly 26% of all renters.
If we adjust for inflation, the U.S. has lost 2.1 million affordable units since 2012. The trend accelerated when the asking rent price spiked during the pandemic. Over half a million low-rent apartment units were lost between 2019 and 2022.
Since 2001, median rents have almost continuously risen in inflation-adjusted terms. They are 21% higher as of 2022. However, renter incomes have only risen 2% during the same time.
Financially Vulnerable Renters Make Difficult Choices
According to the Consumer Expenditure Survey in 2022, financially burdened renters have been forced to make difficult choices due to their tight budgets. For example, the survey reported that extremely cost-burdened renter households spent 39% less on food. They’re also spending 42% less on healthcare than unburdened renters.
Meanwhile, other overburdened renters may choose to live in overcrowded spaces or structurally inadequate homes. This further threatens their health and well-being.
Reinvestment Needed for Aging Stock of Rental Housing
The annual rental housing report states that the current supply of rental housing units is older than ever. In 2021, the median age was 44 years. That’s 10 years older than what it was two decades prior. As a result, there may be problems when it comes to structural inadequacy, habitability, and safety.
Granted, there have been changes to building construction standards. Moreover, property owners have repaired many existing units to minimize the problem. Nonetheless, there is still a large number of rental units that do not meet the minimum standards. Property owners must reinvest in repairs and maintenance costs to keep them in good condition.
High-Interest Rates Slowing Market Activity
Interest rates rose into 2023, and building and purchasing multifamily properties cost more. In addition, there has been an increased cost of equity due to high treasury yields. Apartments must offer greater returns on investment to keep up with Treasury notes.
As a result, there has been a downturn in borrowing and transaction activity. Half of the banks surveyed by the Federal Reserve reported declining demand for multifamily homes. Moreover, almost two-thirds of multifamily lenders created heightened criteria for underwriting due to hikes in interest rates and uncertain property performance. Mortgage borrowing for multifamily properties was down 48% year over year in Q2 of 2023.
Gen Z Driving Rental Demand
Millennials are still a significant source of demand in the rental property market. However, they are aging and entering their prime homeownership years. The current market is already bearing witness to this transition.
Instead, Gen Z is now fueling the growth in rental households. The number of members in this generation is slightly smaller but still large enough to drive demand. The members of Gen Z are those born between 1995 and 2009.
Adjusting to the Trends
The annual rental housing report has shed much light on the current market trends. Landlords and property investors would pay attention to these trends to protect their investments and make the right purchases moving forward.
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