- Young workers are in less-than-ideal living situations because it’s too hard to find better, affordable homes to rent.
- Low vacancies, exorbitant home sale prices, inflated construction costs, and the demand for amenity-filled homes are fueling rent increases.
- There are still ways to score deals on rent even in this tight market—if you’re willing to compromise.
Mike Welford and his wife have lived in their Austin duplex for 10 years. Now raising their young daughter in this 3-bedroom, 1-bath rental, he guesses they're paying about $1,000 under market. Across the street, a developer is building a $1.35 million home.
"Whenever I ask for something to be repaired, my landlord threatens to raise the rent," Welford says. So now, every time a leak springs or an appliance dies, Welford tries to fix it himself. "You don't want to rattle the cage."
For 4 months, Welford and his wife searched all over Austin for a larger rental. One landlord charged Welford $200 to process his application for a $2,300 unit—and denied him without saying why. Welford suspects that the landlord got a flood of applicants and figured he could charge more; the home was later re-listed at a higher rate.
"We're doing okay financially, but we still can't afford that rent," laments Welford. So the family paused their housing search because the process got too overwhelming. "I definitely feel stuck and annoyed that I'm paying someone else's mortgage."
Many millennials are similarly stuck in "Where do I live?" limbo: They can't afford to buy in this white-hot market, and social media and home improvement TV shows have created outsize expectations for their home's features, says Meredith Stoddard, vice president of life experiences at Fidelity. But what's driving sky-high rent prices?
The great affordability crisis
Before the pandemic, rental prices, the number of rentals, and the number of renters were all on the rise, says Jay Parsons, deputy chief economist at RealPage Inc., which provides property management software to the rental housing industry. A shortage of affordable housing and low vacancies spurred that steady rent increase, says Parsons. In states like California, many residential areas are zoned for single-family homes and not apartments or condos, which drives up rents, says Stoddard. "As the population grows, zoning hasn't kept up," she says.
When the pandemic hit the US in 2020, newly remote workers fled high-cost cities such as San Francisco and New York in search of more room or nearby family support. "As cities locked down, the perk of living in the city disappeared overnight," says Parsons. "More people were moving out of rentals in those 2 cities than moving in. That creates higher vacancy, which forces property managers to cut rents." But rents stayed flat in suburban areas during the lockdown, he says, since those areas promised ample space and outdoor amenities.
In 2021, as the US economy reopened, the job market boomed and migration picked up, says Parsons. Many who had moved in with family to quarantine left to live on their own again. Vacancies reached generational lows: Less than 6% of all rentals in the whole market were available by the second half of the year—the lowest availability rate since the early 1980s (other than the second quarter of 2020).1 Rents soared because of simple supply-and-demand economics.
Combine that with inflated construction costs. Higher lumber prices alone added $92 per month on rent for new units between April 2020 and July 2021.2
Then there's the wave of Boomers selling their homes. "They're cashing out and moving to luxury rentals," according to Shailendra Kumar, director of financial solutions for Fidelity. That's adding to the number of wannabe renters without adding any units for rent.
In total, rents on newly signed leases surged nearly 13% in September 2021, compared to what the prior tenant paid, according to RealPage.
The TV effect
Many millennials enter the housing market thinking they can buy a high-caliber home, like what they see on Instagram and TV. But when they find out they can't afford to purchase the kind of house they want, they must continue renting.
It starts with house candy shows on home improvement and real estate channels. "You turn on one of those shows, and young people say, ‘I can't live without central air,' or ‘I've never lived in a place without a covered garage,'" says Stoddard, who adds that millennials' standards are higher than their parents' were. "The baseline has evolved a lot in recent years."
Higher-income renters represent the biggest pool of demand, says Parsons. And developers keep building more expensive, tricked-out units that appeal to them. "These millennials want to live in higher-quality housing in more desirable locations," adds Stoddard. But affording it is a whole other matter.
Data suggests that despite these higher expectations, millennials earn and have significantly less money than their parents.3 When they look into buying their first home, they come to the rude awakening that they don't have enough saved. "If you're priced out of the buying market, it forces you into the rental market," says Stoddard.
By now, you know what that means: People who would normally buy homes are trapped in the rental market, lowering vacancies further and driving rental prices even higher, says Stoddard.
Let's make a deal
Parsons forecasts that as the house-buying market goes from "really hot" to "regular hot" later in 2022, the rental market will, too. "There will be a gradual cooling, but at a slower rate than we've seen," he predicts.
Despite the continued crunch, there are still ways to save on rent. Before you tell your landlord you want to leave, investigate the market first. Weigh all your options—including what it would cost to stay put with a small rent hike. RealPage's data shows that renewal prices are more modest compared to new leases.
Stoddard also suggests a little soul-searching. Ask yourself, "What is most important to me? And what will make my life easier every day?" For instance, Parsons recommends being open about your unit's exact location. Lower-floor apartments, or ones overlooking a parking lot, usually go for cheaper. Once you've homed in on your must-haves, compromise on other elements.
Nancy Batchelor, a real estate agent for Compass in Miami Beach, advises clients to put down a larger deposit in exchange for a monthly discount. Another option is to be flexible on your move-in date and willing to take unusual lease terms, such as a 7-month or a 15-month lease. "You'll get a better rate on a term that's beneficial to the landlord," explains Parsons.
The new normal
Although the rental climate may be discouraging for young renters, some are coping by simply accepting their overpriced fate in the current rental market. For instance, in September 2020, Kelly Shoul and her husband Alex moved from York, Pennsylvania, to their dream city of Denver. The couple, who run an elopement photography business called In Love And Adventure, are avid snowboarders.
Even though they can afford to buy a home in Denver, they decided to rent because they aren't sure where they want to settle. And they didn't want to deal with the stress of selling again.
Shoul spent weeks trying to set up appointments to view homes, but quickly grew disenchanted. "As soon as I would see a listing for a house we liked, it was already spoken for," she recalls. While their 3-bedroom, 2-bathroom house in Pennsylvania had approximately 1,600 square feet on about 3/4 of an acre, they're now living in a duplex studio of about 600 square feet with a small, fenced backyard for their 2 dogs. Their old mortgage was $1,100 a month; the couple negotiated a 2-year, $1,575 a month lease for their current home.
They consider themselves lucky. "Right now, we prefer the flexibility of renting," she says. "We aren't tied down. There's no stress that comes with being a homeowner. We don't have plans to move anytime soon."