Story at a glance
- Rental prices have fallen from their February peak, but leases remain high and experts say renters who recently moved or renewed saw large increases.
- The national mortgage rate reached nearly 7 percent last week, a 16-year high that is more than double the mortgage rate seen last year.
- The rise in mortgage rates is making houses unaffordable for some and forcing would-be buyers back into the rental market.
Sky-high mortgage rates are pushing first-time homebuyers out of the housing market and back into the rental market following several big rate hikes from the Federal Reserve this year.
The phenomenon is exacerbating an already supply-crunched rental market that experts say is experiencing growth well above pre-pandemic levels.
Rental prices have fallen from their February peak, but leases remain high and experts say renters who recently moved or renewed saw large increases.
The national mortgage rate reached nearly 7 percent last week, a 16-year high that is more than double the mortgage rate seen last year.
And experts including Fed Chair Jerome Powell expect rates to rise further in order to “go through a correction” before homes become affordable once again.
Experts told The Hill interest rate increases are indeed working to slow what was a red-hot housing market. But the rise in mortgage rates is making houses unaffordable for some and forcing would-be buyers back into the rental market.
“Rising mortgage rates are keeping the pressure up on the rental market with many potential first-time homebuyers pushed to the sidelines due to affordability concerns,” Orphe Divounguy, Senior Economist at the real estate company Zillow, told The Hill.
“With fewer renters leaving the rental market for homeownership, vacancy rates remain low, keeping rental price growth somewhat elevated. Renters who have had to move recently or had to renew their lease likely saw large rent increases,” Divounguy added.
Annual rent growth is currently double pre-pandemic levels at 12.3 percent. Before the pandemic, growth was around 4 percent to 5 percent a year, Divounguy noted. A panel of Zillow experts forecasted in late September that rents will outpace inflation, stocks and home values over the next 12 months.
Both the rental and housing markets are closely tied as prices and rents tend to move in line with each other, Rob Warnock, a senior research associate with Apartment List, told The Hill.
Warnock explained there are a dearth of historical examples where home prices are falling, or rents are soaring or vice versa.
“When housing is in demand, it’s in demand… I don’t think it bifurcates all that much, even if we look back at other periods where price changes were really dramatic,” he said.
Although the housing market is cooling, rates in each sector of are far higher than before the coronavirus pandemic. Asking rents – rentals listing prices – declined for the first time in 20 months from July to August – dropping 0.1 percent.
The typical monthly rent in September sat at $2,084 while the typical home value was $356,026, according to Zillow. The typical U.S. home price is up by more than 16 percent from a year earlier.
But in-place rents — where renters are already in a lease — are the focus of the Fed’s inflation measures rather than asking rents, said Jamie Woodwell, vice president of research and economics at the Mortgage Bankers Association. Woodwell explained that a moderation in asking rents that soared over the past couple of years means there is still “a fair delta” between in-place and asking rents.
“So, what that probably means is that we are starting to see that moderation in asking rents. The in-place rents probably still have a decent amount of growth ahead of them before they catch up to the growth in the asking rents we’ve seen over the last couple of years,” Woodwell said.
Meanwhile, vacancy rates are the tightest they’ve been in decades, Woodwell noted. The tightness, he said, was created by a decade of under building following the global financial crisis in 2008, which occurred when Millennials were coming of age, forming households and creating a surge in housing demand.
But experts say this heightened demand has pushed builders ramp up production of multi-family units, leading housing starts to the highest level in years with almost 900,000 multi-family units under construction.
“It will take a while before we see a substantial improvement in rent affordability, but a supply increase should eventually boost rental vacancy and decrease pressure on rents— welcome news for renters who have been fighting through a very challenging rental market over the last year,” Divounguy said.