What Happens to Rents in a Recession?
Rents can go both up and down in a recession. The location of a rental property and how hard the local economy is hit by a recession will dictate whether rents go up, down or stay the same.
For example, a working-class housing market that experiences huge job losses during a recession will likely see an increase in vacancies, forcing rents down. This happened in North Dakota in 2015 when oil prices plunged, as the economy in North Dakota was highly dependent on high oil prices.
On the other hand, if a property is located in a less vulnerable area and/or occupied by a tenant with more resources, rents may generally stay the same during a recession.
Houston, Texas serves as a great example of this. Even though oil prices plunged in 2015, home prices increased in Houston, mainly because the metro area has a diverse economy that is no longer reliant primarily on oil production.
Brian’s Note: Rents tend to remain more resilient than property values in a recession. At worst, nationwide rents tend to flatten out during recessions – see this chart:
But as Kathy points out, nationwide averages can conceal some markets rising while other markets fall in recessions.
What’s Happening to Real Estate Right Now?
The biggest crisis in real estate today is not vacancies or delinquencies. It’s a lack of supply. There doesn’t seem to be an end in sight to the affordable housing shortage across in the U.S. In many cities, income is not keeping up with increasing rents or home prices, adding even more financial strain to renters and home buyers.
According to the State of the Nation’s 2019 Housing Market report by Harvard University, 50 percent of renters spend more than 30 percent of their monthly income on rent. Which eliminates a large portion of people that can’t afford to keep up with rising rents.
And sure enough, we’re seeing more tenants planning to non-renew higher rent lease agreements than more affordable rentals. See this data from HousingWire:
To solve this issue, more affordable low-income and middle-income housing needs to be built to meet the demand of buyers and renters. Unfortunately, building costs have increased substantially over the years, making it virtually impossible for builders to provide affordable housing. Most of the new inventory that has been built over the past decade has been on the higher end, as it’s the only way for builders to make a profit.
COVID-19 has caused major slowdowns in both manufacturing and construction, which is further exacerbating the problem. Some builders have stopped building entirely, while others have slowed down substantially. According to the US Census Bureau, in April and May, there were fewer building permits issued, housing starts and completions, compared to a year ago. This trend tells us that this lack of supply may continue for the foreseeable future.
Will Rents Go Down This Year?
Apartment rents in some areas around the country have started to decrease, but only slightly. March through June is normally the busiest season for rental activity, but with the Coronavirus shutting down the economy during those months, many people just stayed put.
However, single family rental rates have stayed consistent and even increased in some areas. There is a new de-urbanization trend emerging of people moving out of the cities and into the suburbs, in search of more space in order to practice better social distancing.
According to a recent report by Apartment List, the national rent index fell by 0.3 percent from March to June. To put this seemingly nominal number into perspective, since 2014 rents grew between 1.0 percent and 1.7 percent (from March to June). This “Pandemic Pricing” shows us how COVID-19 has impacted people financially and even shifted what renters may now be looking for in a place to live.
The cities with the largest decline in rent prices fall into two categories:
- Expensive markets with already high pre-pandemic rents.
- Markets where the local economy relies heavily on service and tourism sectors.
The following 10 cities are experiencing the biggest drops in rent, while the suburbs are gaining speed:
- San Francisco, CA
- Orlando, FL
- New York, NY
- San Jose, CA
- Miami, FL
- Charlotte, NC
- Austin TX
- Houston, TX
- Washington, DC
- Tampa, FL
At a national level, we have yet to see significant drops in rent since the pandemic began. But certain markets that were highly impacted by shelter-in-place orders are seeing a more rapid decline in rents – especially in large, expensive metros where most people lived in condos or apartments. Today, many of the desirable amenities that attracted residents are now closed – including swimming pools, gyms and even restaurants.
As an expert in real estate and housing market dynamics, I bring a wealth of knowledge and experience to shed light on the complex interplay of factors influencing rents during economic downturns. My expertise is rooted in a deep understanding of market trends, economic indicators, and the historical context of recessions.
The article accurately highlights the volatility of rental markets during a recession, emphasizing the pivotal role played by the local economy and geographical location of rental properties. The example of North Dakota in 2015 vividly illustrates how a working-class housing market, heavily dependent on a specific industry like oil production, can experience a surge in vacancies and a subsequent decline in rents when faced with a recession.
Contrastingly, the case of Houston, Texas, serves as a compelling example of resilience in the face of economic challenges. Despite the plunge in oil prices in 2015, Houston's diverse economy shielded it from significant rental decreases, showcasing the importance of economic diversity in mitigating the impact of a recession on the housing market.
The inclusion of Brian's note regarding the relative resilience of rents compared to property values in a recession aligns with empirical evidence. The provided chart demonstrates that, at worst, nationwide rents tend to flatten out during economic downturns. However, it is crucial to acknowledge the nuance within these averages, as certain markets may experience rising rents while others see a decline.
Shifting focus to the current real estate landscape, the article rightly identifies the most pressing issue as a lack of supply rather than vacancies or delinquencies. The Harvard University housing market report from 2019 supports the claim that a shortage of affordable housing persists, with a significant portion of renters spending more than 30 percent of their income on rent.
The discussion on the impact of COVID-19 on the housing market brings attention to the challenges posed by manufacturing and construction slowdowns. The data from the US Census Bureau underscores the potential continuation of the supply shortage due to reduced building activity.
Finally, the analysis of recent trends, such as the de-urbanization movement and its influence on rental rates, is insightful. The data from Apartment List highlights the nuanced effects of the pandemic on rents, with certain cities experiencing declines, particularly those with high pre-pandemic rents and heavy reliance on service and tourism sectors.
In conclusion, my expertise in real estate affirms the multifaceted nature of rental market dynamics during recessions, considering factors such as local economies, geographical locations, and broader economic trends.
