Home prices aren’t the only thing that’s at an all-time high; rent prices have increased by 149% from 1985 to 2020, the average rent increase per year being around 3.2% year-over-year. Between Q1 2021 and Q1 2022, the average rent increase rose to a staggering 18% (rent increased over 20% in one state)!
The average rent in the United States is $1,326 per month, an 18% increase ($238.68) could be the difference between keeping the lights on or not being able to buy their medications. Let’s be honest, from a tenant’s point of view, no one likes to get that letter stating their rent is increasing, especially if they’re one of the 41% of Americans who live paycheck to paycheck.
That aside, rent isn’t increasing everywhere. Zumper CEO, Anthemos Georgiades, sees declining rent prices as a market correction due to overpricing.
“We saw historic levels of migration throughout the pandemic, as people switched to working from home and re-imagined their living situations. Now—with a turbulent, unpredictable economy causing fear of recession—migrations are slowing, occupancy rates are falling and rent prices are following suit,” he said in Zumper’s National Rent Report for October 2022.
Highest and Lowest Average Rent Increase Per Year
Veteran Fannie Mae economist Tom Lawler predicted that rents nationwide will not only slow down in 2019 but also face a rare “true fall” in real dollar amounts. And in 2023, those decreases are probably going to drop even faster
In certain markets across the US, rents have already begun to fall. According to data, nationwide asking rentals decreased by 0.4% in Q3 2022, which contrasts with just one year prior when demand drove prices to record highs.
Lawler’s prediction is based on the notion that builders continue to build new rental units even though there’s a decline in renters who can afford to live in them. In a real estate market that’s been plagued with a lack of affordable housing, it’s unusual to have an excess supply.
According to Credit Karma, here are the states with the highest and lowest rent increase from 2021 to 2022:
Note: These figures do not indicate the most and least affordable rental markets.
|Highest Rent Increase||Overall||1-Bed||2-Bed|
|Lowest Rent Increase||Overall||1-Bed||2-Bed|
Do the Number of Bedrooms Increase Rent?
It’s also important to note that the rent increases between 2021 to 2022 were the same for both one- and two-bedroom units. It’s a nationwide fact that more bedrooms a unit has typically warrants higher rent, but what’s interesting is that from January 2021 to June 2022, rent for one and two-bedroom units increased by 24.2%.
During this period, the average rent per month for the national average for a one-bedroom rental increased from $941 to $1,169, while the price of a two-bedroom rental increased from $1,093 per month to $1,339.
Factors That Contribute to Rent Increases
Some of the increase in rental prices can be attributed to the inflation rate, which skyrocketed from 1.2% in 2020 to 7.5% in 2021. However, since 2000, the average rent cost has surpassed the inflation rate by 29%. While inflation increased by 70% while the rental rate increased by 90% during that time.
Rent costs are influenced by a variety of economic and social factors, including:
1. Competitive Housing Market: The National Association of Realtors (NAR) reports that in 2021, the median price of a home sold increased by about 17% to $346,900. 85% of prospective millennial homebuyers have been priced out of the marketplace due to the high cost of housing. Millennials who are unable to purchase homes opt to rent and to extend their leases.
2. Low Supply Unable to Meet Demand: Although there is a huge demand for apartments, there aren’t enough of them available, allowing landlords the power to hike rent. In 2020, the number of new apartment buildings was at a five-year low, and 83% of multi-family real estate developers reported construction delays. In addition, the price of building materials like plywood and timber rose by 35.7% in January 2020. Fortunately, experts predict that prices will decline by 22.6% on top of the 8.8% decline in Q3 2022.
3. Compensating for Relief Programs: While the epidemic was going on, some states and localities enacted rent freezes and emergency rental assistance programs to assist keep costs down for suffering families. These restrictions have mostly come to an end, and landlords have adjusted their rates to reflect nearly two years’ worth of hikes.
4. Remote Work: As the pandemic carried on, 75% of wealthy families who make more than $100,000 annually were choosing to migrate away from large metropolitan cities chose to move to less expensive or smaller cities where they could afford more lavish housing. Interestingly, remote work wasn’t the primary reason people were leaving, but it did play a role in the decision. When more affluent people relocate to new areas, they’re bringing money that can help the community grow and create new job and business opportunities.
Can We Predict 2023’s Average Rent Increase Per Year?
Many people are concerned about what 2023 has in store, regardless if they’re hoping to buy or sell a primary residence or if they’re an investor looking to find their next great deal. Things like rising mortgage rates, declining home sales, and overpriced real estate are great causes for concern, and it’s a good time to start looking at expert predictions to determine your next course of action.
In order to combat inflation, interest rates will rise, some predict that it could reach as high as 8.5%, if not higher. While this is alarming, you needn’t go into panic mode at the moment. Experts believe that housing prices will come down, especially in markets where home prices were 20% to 25% overvalued.
The executive VP of Market Intelligence for ATTOM, Rick Sharga, optimistically predicts rates will peak at 8% for a 30-year loan and 7.25% for a 15-year loan. If the Federal Reserve is able to get a handle on the rampant inflation, Sharga believes rates could come down to 6% and 5.25% respectively.
Correcting Home Prices
This summer, property values increased in 779 markets while they decreased in 117 markets. Those increases were quite high in markets on the East Coast like Miami (up 4.1%), and Myrtle Beach, South Carolina (up 4.5%).
In other words, it’s a mix-bag and there’s no real way of knowing which way a market will turn.
Zillow anticipates that the Western housing markets will continue to have home price corrections until the end of 2022, but at a slower rate. Markets like Phoenix, Arizona, and Salt Lake City, Utah experienced home values decline another 2% on top of the already 4.4% and 7.1% decline we saw in the summer.
Short-Term and Long-Term Rental Market Recovery
Although the pandemic severely impacted the vacation rental market, the downturn was only temporary, and the short-term rental market has already begun to rebound. The recovery is predicted to continue through the end of the year. It’s even predicted that short-term rentals will be the more profitable investment strategy in 2023.
That said, there’s a growing interest among investors who want to try their hand at both short-term and long-term rentals. There’s been a spike in long-term Airbnb rentals, partially thanks to traveling nurses and other professionals in need of temporary housing that isn’t a hotel.
In comparison to regular rental properties, this rental strategy offers investors a better rental income as well as greater predictability and lower vacancy rates than short-term rentals.
Also, the number of remote workers who would rather travel for long stretches of time while working is likely to increase, resulting in an even higher demand for long-term, fully furnished vacation rentals in 2023.
Of course, although we can’t say for sure what 2023’s average rent increase per year will be, signs indicate it’ll be a good year to buy real estate — depending on your local market.