Consumers Prefer to Rent Homes Due to High Rates

While there is a very low correlation between real estate and the stock market, home prices continue to increase along with inflation.

Homeownership today is becoming more of a massive challenge, even if you don’t take inflation into account. According to a CNBC report, home affordability today is still elusive for many families and individuals. Even if interest rates hit close to 5% in mid-August, we’re still in the 10 least affordable months in 30 years. As a result, many people are forced to rent homes instead of owning one.

The continuous upward movement in home prices is pushing more and more people to rent homes. You’re now paying $650 more to buy a house compared to the start of the year. The market might’ve cooled a bit, but it’s still on an upward trend. We’re at a strange place now in the real estate market with the market cooling; inventory is increasing, and interest rates are on a roller coaster ride.

All of the above factor into the attractiveness of passing on buying homes and just settling on renting one.

Most market experts and analysts expect that 2022 will end with interest rates at the 5.00% marker. However, we already went past that point in Q2 2022. It’s been a series of ups and downs since then, the latest being a drop to near 5% in mid-August only to go up again as September rolls in.

The bottom line is that home affordability is set back to a 30-year low, and the (mostly) rising interest rates are pushing people to just rent homes instead.

What Does This Mean for Real Estate Investors?

Real estate investors are somewhat divided by this news. Their reactions mostly depend on their investment strategies. Since interest rate movements significantly impact the housing and rental markets, investors are considering how to go about them.

Those primarily involved with house flipping and wholesaling might need to rethink their strategies since home sales aren’t doing well. Sellers are pulling back and waiting for the market to become hot again (unless they’re desperate to make a quick sale). It leaves investors with fewer options. However, because of the high prices, the competition in the market is relatively lower, balancing out the supply and demand.

Homebuyers are apprehensive because of the current interest rates. Potential homebuyers tend to wait for the right time to buy when interest rates are more affordable. In the meantime, they prefer to just rent homes.

If you’re an investor dealing with rental properties, now is a good time for you since there is a greater demand for rental properties. You can look for an investment property and try to negotiate a good deal. Given the prevailing market conditions, sellers are more likely to hear you out and see how you can help each other.

In doing so, you can help meet the demand for rental properties and get a good return on investment. The truth is, there will always be demand for traditional rentals. It’s just that the rising interest rates are making it far more difficult for regular folks to own homes at this time.

High Mortgage Rates - Demand for Traditional Rentals

As an investor in traditional rentals, now is the best time to take advantage of the increasing demand for rental properties.

Top 10 Cities with the Highest Price to Rent Ratio

For investors who wish to take advantage of this new demand for rental properties, location plays a crucial role in your investment success. Buying investment properties in random locations may not give you the best return on your investment. You need to do your homework first so you can get the optimum return on investment for every dollar you spend.

When determining the profitability of a traditional rental property, you need to consider what a particular market can offer you. You should note the prices of homes on the MLS, the market’s average cash on cash return, and the price to rent ratio. That last factor is a pretty good indicator of whether a market is doing well for long-term rentals.

What Is a Price to Rent Ratio?

Price to rent ratio is a metric used by investors to see if owning traditional rental properties is viable and profitable in a particular market. It is the ratio of the prices of homes to the annualized rent in an area. Investors use the metric to estimate if it’s more practical to own a house or rent one in a given market.

Investors use a certain gauge to see how traditional rentals fare in a market. A lower score of 15 and below means it is better to buy a house. A medium score of 16 to 20 indicates that you can go either way. Higher scores of 21 and above mean that it is far more practical for people to rent homes than buy one.

That said, we’ve prepared a list of the top 2022 US housing markets with high price to rent ratios. The list contains only those with median property prices below $1 million, traditional rental income of at least $2,000, and a minimum of 2.00% cash on cash return. The locations are arranged from those with the highest to the lowest price to rent ratio, according to Mashvisor’s data as of August 2022.

1. Honolulu, HI

Median Property Price: $958,238
Average Price per Square Foot: $940
Days on Market: 88
Number of Traditional Listings: 3,616
Monthly Traditional Rental Income: $2,571
Traditional Cash on Cash Return: 2.71%
Traditional Cap Rate: 2.77%
Price to Rent Ratio: 31
Walk Score: 44

2. Fayetteville, WA

Median Property Price: $546,889
Average Price per Square Foot: $241
Days on Market: 63
Number of Traditional Listings: 885
Monthly Traditional Rental Income: $1,540
Traditional Cash on Cash Return: 2.16%
Traditional Cap Rate: 2.22%
Price to Rent Ratio: 30
Walk Score: 48

3. Aiea, HI

Median Property Price: $719,590
Average Price per Square Foot: $577
Days on Market: 56
Number of Traditional Listings: 102
Monthly Traditional Rental Income: $2,077
Traditional Cash on Cash Return: 2.32%
Traditional Cap Rate: 2.36%
Price to Rent Ratio: 29
Walk Score: 13

4. Prescott, AZ

Median Property Price: $794,517
Average Price per Square Foot: $357
Days on Market: 74
Number of Traditional Listings: 150
Monthly Traditional Rental Income: $2,302
Traditional Cash on Cash Return: 22.2%
Traditional Cap Rate: 2.26%
Price to Rent Ratio: 29
Walk Score: 47

5. Cape Coral, FL

Median Property Price: $690,216
Average Price per Square Foot: $871
Days on Market: 58
Number of Traditional Listings: 1,011
Monthly Traditional Rental Income: $2,088
Traditional Cash on Cash Return: 2.41%
Traditional Cap Rate: 2.47%
Price to Rent Ratio: 28
Walk Score: 77

6. Hallandale Beach, FL

Median Property Price: $915,115
Average Price per Square Foot: $461
Days on Market: 75
Number of Traditional Listings: 696
Monthly Traditional Rental Income: $2,795
Traditional Cash on Cash Return: 3.19%
Traditional Cap Rate: 3.30%
Price to Rent Ratio: 27
Walk Score: 79

7. Chevy Chase, MD

Median Property Price: $796,200
Average Price per Square Foot: $472
Days on Market: 56
Number of Traditional Listings: 159
Monthly Traditional Rental Income: $2,538
Traditional Cash on Cash Return: 2.59%
Traditional Cap Rate: 2.66%
Price to Rent Ratio: 26
Walk Score: 67

8. Broad Run, VA

Median Property Price: $935,167
Average Price per Square Foot: $196
Days on Market: 53
Number of Traditional Listings: 232
Monthly Traditional Rental Income: $2,989
Traditional Cash on Cash Return: 2.09%
Traditional Cap Rate: 2.11%
Price to Rent Ratio: 26
Walk Score: 3

9. Bethesda, MD

Median Property Price: $853,247
Average Price per Square Foot: $450
Days on Market: 53
Number of Traditional Listings: 432
Monthly Traditional Rental Income: $2,801
Traditional Cash on Cash Return: 2.52%
Traditional Cap Rate: 2.57%
Price to Rent Ratio: 25
Walk Score: 73

10. Mount Pleasant, SC

Median Property Price: $938,241
Average Price per Square Foot: $403
Days on Market: 43
Number of Traditional Listings: 157
Monthly Traditional Rental Income: $3,094
Traditional Cash on Cash Return: 2.72%
Traditional Cap Rate: 2.76%
Price to Rent Ratio: 25
Walk Score: 53

Wrapping It Up

The increasing home and mortgage prices are pushing more and more people into the rental space. As people prefer to rent homes now, investors are rethinking their strategies and considering getting into rental property investment.

Use Mashvisor to find the best possible rental property in the most profitable rental market. The platform’s real estate heatmap alone will show you which areas will give you a good return on investment.

To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.

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High Mortgage Rates Pushing Consumers to Rent Homes Instead of Buy