Rental Market Trends for 2022

Mid-Q2, real estate investors and renters alike are trying to figure out what the rest of 2022 will look like for the US rental markets. Coming into 2022, there was widespread anticipation of interest rate hikes by the Federal Reserve to bring the 8.5% inflation rate back down closer to its historical 2% target rate. After the Fed’s announcement that it was increasing its short-term lending rate by 50 basis points, many are revisiting earlier forecasts for 2022 and considering the possible impact of that rate increase and the ones that are likely to follow over the next few months.

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2022 Forecasts Prior to Interest Rate Hikes

Prior to the Fed taking action to slow economic growth and reduce inflationary pressures, rental market forecasts for 2022 highlighted:

• Rent growth in 2022 of as much as 7.1%, outpacing the growth of single family home prices in many markets, and a more competitive rental market due to increased demand and low vacancy rates
• Increased demand for larger rental units due to more people choosing to work from home long-term or living with roommates
• Increased return on real estate investments from high home prices and increased rents
• Continuing exodus of renters (and home buyers) from urban centers to suburbs
• Increased scarcity of single family rentals

Rate increases by the Fed invariably impact mortgage interest rates, which in turn impact the U.S. rental market. Increasing the Fed Funds rate is not the only way the Fed has to cool down the consumer demand that fuels price increases. The Fed already has announced its intent to reduce its Treasury securities and bond holdings to help limit the nation’s money supply and decrease the inflation rate.

For more than a year, the housing market has been a major driver of inflation in the United States. The Fed’s philosophy is that inflation will remain high unless the growth in home prices, which was 19.8% during the 12 months ending in February 2022, slows considerably. 

That does not mean that home prices will fall, but rather that they won’t continue climbing so much faster than personal income that many are priced out of the home-buying market. And it may take additional rate increases by the Fed to decelerate home price increases. 

One important question is how soon rising mortgage rates will slow the increase in home prices and what that means for real estate investors. Many banks had already raised their mortgage rates earlier in 2022 in anticipation of an increase in the Fed Funds rate.

 

Not the Typical Inflationary Period

During periods of high inflation, we’re often reminded by the economic pundits that what goes up inevitably must come back down. The national economy is cyclical in nature, and its cycles are predicted by certain economic indicators. Inflation typically is the result of increases in production costs or in the demand for products and services. In the last year, the U.S. economy has experienced both. 

The global Covid-19 pandemic and the measures taken to combat it created labor shortages and supply chain disruptions that reduced the supply of consumer goods and increased prices. At the same time, the economic stimuli implemented to ease the financial strain of simultaneous job loss and higher prices put money into the hands of people and businesses, and growing consumer demand bumped headfirst into dwindling supply. 

That’s a rather simplistic explanation, but the point is that inflation took off faster and climbed farther than most expected, and it won’t come down overnight. Whether or not housing prices come down from their current high or merely increase more slowly than they have of late remains to be seen. 

 

What to Expect for the Rental Market During the Remainder of 2022

So, what does all of this mean in terms of the forecasts made for the 2022 rental market prior to recent moves by the Fed?

High Rents

As long as rental property owners can charge high rents and not see vacancies go up, they will continue to do so. Increased multifamily construction should expand supply and help slow the increase in rental prices, but rents are unlikely to come down. There still is a nationwide shortage of rentals, with low vacancy rates, and it is as yet unclear how the expiration of eviction protections in many housing markets will impact the situation. Young adults entering the job market and seeking independence will only add to the demand for rental housing. And home ownership is likely to remain beyond the reach of many given high home prices and increasing mortgage interest rates.

Demand for Larger Rental Units

It is likely that demand for larger rental units will continue to grow, as remote work arrangements have become the preferred mode of operation for many individuals and companies. Additionally, renters are finding relief from high rents by living with roommates, which requires more space.

Better ROI for Investors

The combination of appreciated property values and high rents is paying off in a better ROI for many current multifamily real estate investors. That is not likely to change in 2022. 

Migration to the Suburbs

Early in the pandemic, there was significant migration from cities to lower population density areas by people seeking to reduce their risk of coronavirus exposure. That exodus was, and still is, being driven by the geographic freedom afforded by working remotely, as well as lower rents and home prices in suburbs and rural areas. 

Low Supply of Single Family Rentals

The main reason why the supply of single family rental properties is shrinking in many areas is that young families hoping to buy their first home are being priced out of the market. The next best choice for them has been a single family rental, which provides many of the advantages of living in a single family home without the high price tag. That is unlikely to change until purchase prices and mortgage interest rates start to come back down or at least stabilize.

 

Takeaways on Rental Market Trends in 2022

It’s safe to say that the economic consequences of a global pandemic introduced more than the usual degree of uncertainty into using economic forecasts to make decisions about real estate. Basic forecasting assumptions and the trends observed or anticipated may hold true as the Federal Reserve Bank takes measures to rein in inflation, but the degree and speed of change is difficult to predict with any accuracy. How quickly the real estate industry returns to normal, or to what will be the new normal, remains to be seen.

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