Rent Inflation Stays High but May Not Sustain Itself

Just when you think it couldn’t get any worse, it did. Housing and rent are now the new gas, with rent inflation hitting consumers really hard.

In the 12 months ending August, prices rose at an 8.3% rate. Excluding the food and energy sectors, it went up by 6.3%. This indicates that the inflation rate is still far from stabilizing and may still go in either direction over the next several months. 

With the Federal Reserve taking an aggressive stance to soften inflation’s impact on the economy, it had just raised its short-term benchmark by another 0.75%, making it the third consecutive time the Fed is expected to do so. 

The latest inflation figures come barging in despite a 30% drop in average gas prices to about $4 a gallon. Now, the rising shelter rates, especially the increase in rent across the board, are catching the economists’ and experts’ attention. 

Rental rates increased by 0.7% in August from the previous month, which is the fastest monthly growth rate seen since January 1991. The annual rent inflation rate also logged in the largest jump in four decades at 6.7%. The bad thing is that there are no signs of slowing down. 

It is not looking good for those looking to buy properties as their primary residence or as investment properties.

Related: High Mortgage Rates Pushing Consumers to Rent Homes Instead of Buy

What Is Rent Inflation?

At face value, the term rent inflation simply means the rate at which rental prices increase. However, it also means several things to both homebuyers and real estate investors. 

Housing affordability, which covers property prices and mortgage rates, is inching farther from the average person’s grasp as each day passes. Overall, the 2022 US housing market might have started to cool down, but the volatility of mortgage rates has been pushing would-be property buyers to rental spaces. 

Renting is a temporary option for those looking to own homes as it is far more affordable compared to the outright cost of buying real estate. However, rental rates are starting to catch up and making it hard for the average person to even rent a place. 

The thing about rent inflation is that even if inflation peaks, it doesn’t mean that rental rates stay put. Rent prices continue to go up, albeit at a much slower pace. At this point, they are poised to keep their upward trend as the demand for rental properties remains high. 

Related: Current 30-Year Mortgage Rates Stay Above 6%

Who’s Impacted the Most?

According to a USA Today article, the ones who are taking the brunt of the impact are middle-income and younger Americans. 

The same article says that data from the Bank of America shows that consumers with an annual household income of $51,000 to $100,000 saw median rent payments go up 8.3% year-over-year in July. 

People earning $50,000 or less annually saw a slightly lower increase of 7.4%. The ones least affected by the current rental inflation are, ironically, those with an annual income of above $100,000. 

Additionally, younger Americans born after 1996—Generation Z—suffered the biggest increase in median rent, with a 16% year-over-year rise in July. Baby Boomers (those born between 1946 and 1964), on the other hand, saw only a 3% increase in rental rates.

Investing in Rental Properties Today

The soaring rental rates are balancing out low-price-to-rent ratio areas making buying and renting like flipping a coin. 

Areas with a lower price-to-rent ratio of 14 and below mean that buying a property—whether intended to be a residence or investment property—is more practical than renting. On the other hand, areas with a high price-to-rent ratio of 20 and above are locations where property prices are very expensive, making renting a much more practical option. 

However, at the current rate of rent inflation, consumers are left with very few choices as buying a property and renting one are both on the expensive side. If you’re a real estate investor looking for an income property, you will find yourself in a challenging situation. Investing in a rental property is getting more expensive, while people are finding it harder to make rent. 

Despite rent inflation and property price increases, you can still find promising investment properties in promising neighborhoods with the help of a real estate platform like Mashvisor. You can use its real estate heatmap to show you which areas yield the best cash on cash return on still-affordable housing. 

You may also utilize its rental comps to make a fairly accurate and realistic rental market analysis to ensure you charge rent accordingly and reasonably. Affordable and reasonable rental prices tend to attract tenants who are having a hard time finding affordable rentals.

To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.

Is Rent Inflation Good for Landlords?

Looking at it at face value, rent inflation might seem like a gift to landlords everywhere. However, given the long-term effects of unaffordable rent prices and inflation in general, ordinary people will eventually find it difficult to make rent. 

Some factors that contribute to increasing rental rates are:

• Higher consumer demand as more people are forced into rental spaces by increasing mortgage rates and housing prices
• Lower inventory;
• Landlords trying to cope with the pandemic-induced rental losses; and,
• Higher maintenance costs due to inflation.

That being said, landlords will seem to get the upper hand in such situations as people are left with no other choice but to rent. Compared to the outright cost of buying a property, renting a house is still far more affordable despite the fast-increasing rates.

However, it will eventually put downward pressure on tenants as they scramble to meet their other financial obligations. Eventually, something will give and can cause renters to make more frequent late payments. Despite the Fed’s aggressive stance in battling inflation, the surging rent prices indicate that the battle is far from over. 

At this point, the high rent rates might not sustain themselves even in the short term.

What Should Landlords Expect in the Coming Months?

Last month, Goldman Sachs predicted that there would be an increase of around 0.6% to 0.7% in rents over the next several months. 

Mashvisor’s September 2022 report shows that the average traditional rental income in the country at the state level is $1,909.16. See how the figure compares to the previous three months: 

• June 2022: $1,809.61
• July 2022: $1,840.14
• August 2022: $1,843.47

The change between July and August seems incremental. Still, the huge jump of more than $60 in monthly traditional rental prices between August and September shows how fast rent inflation went by in just one month.

Over the next few months, we will likely see rent prices continue their upward movement with no end in sight. The fact of the matter is that rent inflation is not going away anytime soon. However, it is not something to take advantage of. This is no milking cow for landlords and rental property investors. 

If you want to make the most out of the situation, it is still recommended that you set reasonable prices. Affordable rental rates attract more tenants and keep your vacancy rate as low as possible. 

Related: Housing Prices in 2022 Keep Rising Despite Inflation Falling in July

Wrapping It Up

If you want to make the most of the situation in a tough economy, use a platform like Mashvisor to look for the most affordable rental properties. Our Property Finder tool and rental comps will help you locate the most profitable properties and set attractive rent prices.

Even with rent inflation, you can still make a decent monthly income and help meet the current housing demand. You can start doing so by offering a reasonably priced rental within most people’s reach.

To get access to Mashvisor’s real estate investment tools, click here for a 7-day free trial, followed by 15% off for life.