Posted 06/26/2018

by Peter Warden

Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.

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How much rent can I afford: predicting your next rent increase

how much rent can I afford

Peter Warden

The Mortgage Reports Contributor

Predicting your next rent increase

How much rent can I afford? Millions of Americans are asking themselves that question as rents soar in many markets across the country.

This isn’t a universal problem. As a nationwide average, rents actually fell between September 2017 and January 2018. And, while that broad trend has since reversed, many parts of the country are still seeing stagnant or even falling rents.

However, they’re rising steeply in most large cities and also in areas of economic growth. You know: the places many people really want to live.

Verify your new rate (Jul 19th, 2018)

Some rental trends

In 2017, Pew Research Center reviewed the housing market. It found more Americans renting now than at any time in the last 50 years. In 2016, 36.6 percent of heads of households in this country were renting. That compares with 31.2 percent a decade earlier.

Related: Renters (How to make a winning repair request)

If you look at people under 35 that year, very nearly two in three (65 percent of) heads of households are renters. That was up from 57 percent 10 years before.

Across the population as a whole, those levels of renting have broken highs set in 1986 and 1988. Indeed, they’re within spitting distance of the level last seen in 1965.

Who rents?

There are very clear relationships between the likelihood of your being a renter and your educational achievements. Just over half (52 percent) of those who didn’t graduate high school rent. That compares with 38 percent of those who did but didn’t graduate from college. The level for those who completed college was 29 percent.

Similarly, your membership of certain minorities affects your chances of being a renter. If you’re head of a black or Hispanic household, you’re roughly twice as likely to rent as your white counterparts are.

How quickly are rents rising?

A few months ago, a colleague arrived in the office in a state of shock. He wanted to renew his expiring lease but his landlord was demanding an extra $1,000 a month.

In some rental hot spots, such rises are still possible. Those include Orlando, FL, Salt Lake City, UT, Knoxville, TN, and Las Vegas, NV.

Rent rises slow

However, nationwide there has been an appreciable slowing in the rate at which rents are rising. That doesn’t mean they’re falling; they’re just going up more slowly in most markets.

Related: Renting can cost more upfront than buying

Apartment List’s national index for June 2018 shows rents nationwide increased by 0.4 percent month-over-month in May. The annualized rate that month was 1.5 percent, which is lower than it has been for a couple of years.

It’s also substantially lower than the current rate of inflation, meaning renting is eating up a smaller proportion of your household outgoings. Whether it is becoming more affordable will depend on how quickly your income rises.

However, the rental market is seasonal, and summer is the time for peak activity. That means that rents might move up more quickly than recently in the months following that June. They may fall back after that seasonal bump.

Popular cities still expensive

Of course, in places where demand is high, rents are still rising quickly. In May 2018, Apartment List reckons, the year-over-year (Y/Y) rise in rents in Houston, TX, was 3.4 percent, more than twice the national average.  In Phoenix, AZ, it was 2.2 percent.

And, in some markets, rents remain ridiculously expensive, even if they’re not rising quite as quickly. Although rents increased in May by a modest 1 percent Y/Y in New York, NY, the median monthly rent for a one-bedroom apartment was still $2,090. The same figures for San Jose, CA, were 2.1 percent and $2,070.

How much rent can I afford in the future?

There are signs that recent slowing in rent rises might continue. True, that summer bump might skew the figures. But in the medium term, there are reasons for optimism. The following are some of the trends that might moderate increases, at least in some markets.

Related: Is it better to rent than to buy a home?

More new homes

The U.S. Census Bureau calculates that the number of new private housing starts in April 2018 was 1,287,000, expressed as a seasonally adjusted annual rate. The raw figure is pretty meaningless until you compare it to April 2017’s, which was 1,165,000.

That’s a whopping 10.5 percent increase in the number of new residential construction projects in just 12 months! And that means the construction industry, which has been in the doldrums for a decade or so, is finally showing signs of life. Indeed, some estimate that the building of apartments in 2017 was at a 20-year high.

This could be good news for renters and first-time homebuyers alike. The property market is all about supply and demand. And an increase in supply usually leads to lower — or, at least slower rising — prices.

Writing in Forbes early in 2018, AppFolio vice president Nathaniel Kunes made a bold prediction:

“Where we’ve been seeing 6–8 percent growth in rental prices in years past, we’ll see that trajectory stall out, eventually nearing historical rent growth average (around 2 percent),” he wrote. “Much of that may have to do with falling occupancy rates, which often result from increased supply in some cities as construction catches up.”

More homeownership

In the second quarter of 2016, the homeownership rate nationwide dipped to the lowest it’s been since the mid-1960s: 62.9 percent. But it’s been rising since then, and by the end of 2017 was back up to 64.2 percent, according to the Federal Reserve Bank of St. Louis.

The more people who own their own homes, the less competition there is in the rental market. So, if the trend continues, that should take some pressure off renters. It’s still a great time for creditworthy renters to become homeowners, especially with all the down payment assistance programs that are available to first-time buyers.

Related: Complete guide to down payment assistance in the USA

It’s good to share

TransUnion reports a December 2017 survey that suggests that 30 percent of adults of working age are “doubling up,” which means sharing with one or more roommates or family members. For those age 23-29 years, that shoots up to 54 percent.

Just how satisfactory that arrangement is will depend on your roommate. But the more people are doubling up, the fewer the apartments are needed. We’re back to supply and demand.

Related: How to get out of a lease with a roommate

More government help

Kunes expects increasing interventions from state and local government to make housing less expensive. Many already require new developments to include a proportion of housing units that are affordable. Initiatives allow essential workers on moderate pay scales, such as teachers and first responders, to live near their workplaces.

However, Kunes anticipates yet more interventions, including tax credits for landlords who build affordable homes and work with underserved groups. Any such programs could hold down rent rises more generally in the areas where they operate.

Few expect rents to actually fall nationwide as a result of any of the above trends. Continuing rises seem much more likely.

But, unless you live in one of those rental hot spots, there’s a glimmer of hope. Maybe your housing costs will eat up a smaller proportion of your household outgoings. Who knows? Perhaps quite soon that “How much rent can I afford?” question could become less pressing.

Verify your new rate (Jul 19th, 2018)

Peter Warden

The Mortgage Reports Contributor

Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

2018 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)