Inverse relationship between the real estate market's downward trend vs rents
Updated: Dec 24, 2022
When the real estate market is in a downward trend, landlords tend to raise rents as they are able to command more money for their property. Inverse relationships between rents and the market have been observed time and time again, indicating that when prices fall below a certain point, landlords start raising rents in order to maintain comfortable profits.
This phenomenon began happening during the housing crisis of 2007-2008, when subprime mortgages were securitized and sold on Wall Street. These securities became worth a lot of money due to skyrocketing values but eventually went bust when large numbers of people defaulted on their loans. As a result, many homeowners were suddenly unable or unwilling to pay high rent rates because they no longer had any equity in their properties.
According to these Fort Worth property managers since then, inverse relationships between rental prices and markets have continued throughout various stages of different economies around the world.
What is happening in real estate right now?
There is no confusion around the fact that the real estate market is currently experiencing a slowdown. In order to understand this, we need to look at a few facts that have led to this point. One of the main reasons for real estate's downward trend is the rise in mortgage rates. There has been a recent rise in mortgage rates across the U.S., and this might not be good news for everyone. When you're buying a home, one of your biggest concerns is always whether or not you will be able to afford it. And with mortgage rates reaching all-time highs, that could soon become a reality for many people. At the beginning of the year, mortgage rates started around 3% and have reached 6% in a few months, meaning more people are paying almost double in mortgage for the same property. According to Innova Realty this increase has made potential buyers back away from purchasing homes.
Another thing that contributes to the downward trend of real estate is the low supply in the market, combined with high prices. Even though the supply of this year is bigger than the one of last year, it still can not meet demand. More so, home prices are around 43% higher than three years ago. Home construction is slowing down as concern for lack of potential customers is rising and increased costs of construction materials. Not only this but there has also been a shortage of construction workers, and construction companies have experienced increased difficulty in easily finding qualified and reliable employees. They have also experienced increased difficulty in finding materials such as windows or doors due to a general lack in the market.
What has been happening with rents in the US
Asking rents in the second quarter of the year were 23% higher across the U.S. in comparison with 2019. Rents nationwide continue to rise at the fastest rate in decades. Even though many states and management companies have set regulations that limit the rent increase, now, most of these measures have expired with the pandemic well under control. Many people claim that now landlords will try to make up for the two years when they’ll renew their leases.
Working remotely has led many people to relocate to warmer, previously less expensive places. Some examples are Florida, Nevada, and Arizona. The exodus from big cities and the increased demands for new places in these states have led local landlords to increase the rent. In Florida, for example, there has been a 39% increase in rent during the pandemic.
How a real estate downfall leads to increased rents
Even if the real estate market is going down, rents seem to be at an all-time high. Lower home purchasing means increased demand for rental properties, allowing landlords to set a higher rent. According to Comble property management the increased costs of home ownership lead to the rental market being recession-proof.
Landlords have the unique opportunity of capitalizing on the renewed demand for rentals. This is even more accentuated in areas where workers choose to conduct their business remotely. Many renters have chosen to trade up for more square footage, allowing landlords to upgrade their units to charge more.
We live in a fast-paced economy where the general trend is not looking so good, especially for lower-income individuals and families. While rents may stay the same or increase during a waiting recession, people’s income stays the same, or they lose their jobs, making it complicated to afford a roof over their heads. According to experts, the inverse relationship between the downward real estate trend and increased rent is expected to continue in 2023.
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