Despite encouraging signs, the housing market is still not recuperating at a healthy pace. Home prices remain low, yet the buyers just aren’t there. But where one market drags, another one flourishes.
Rental properties are providing huge returns for those able to make the investment.
The price of rent has been increasing rapidly in cities all over the country. But the cities where demand has increased significantly are those with strong job markets. Cities on the coasts like Washington D.C., Boston, Los Angeles, and Seattle are seeing rent demand push prices up as they add more jobs.
And there’s no healthier job market in the United States than the tech industry.
In the hub of the high-technology market, the San Francisco Bay Area, rents are up 12% year-over-year in November. That 12% increase is “the best in the country” according to UC Berkeley economist Kenneth Rosen.
The average rent in San Francisco is as high as $2,572.
Why have rents increased so much?
The demand for rental units has risen over the last decade. Part of it is due to the increase in foreclosures, but there are other factors that also contribute.
San Francisco saw a population increase of almost 300,000 residents since 2000. And much of those new residents are affluent tech workers able and willing to rent.
According to Rosen, 19,000 jobs were added in San Francisco, and over 40,000 in Silicon Valley. Most of these jobs are in technology, bio-tech, and social media. This led to the influx of affluent professionals to the Bay area.
Add to this a slow-growing housing infrastructure, and the result is upward pressure on rent prices.
Many of the coastal cities are seeing a supply that’s slow to respond. Until more rental units are constructed, applicants will keep driving the price of rent up.
In fact, there are so many applicants for each rental property that some realtors have spotted unique business opportunities. In San Francisco, many realtors are now charging a fee just to look at a property.
With hundreds of applicants per property, this is not an insignificant revenue stream.
But with home prices so low and interest rates at historic lows, why don’t people consider buying?
Many consumers are frozen out of the housing market because of foreclosures. Before they can be homeowners again, they need to rebuild their credit.
Some consumers are willing to buy, but banks aren’t lending as freely as they used to. Until confidence in the economy picks up, loans will be hard to come by.
But more than finance, emotions are a big factor.
Many people don’t want to own a home. The housing bubble showed how quickly a booming market can turn sour, and this lesson is still imprinted in the minds of many. There is still insecurity about housing prices, and some aren’t prepared to take that risk so soon.
There is now an entire generation of first-time homebuyers who are opting to rent instead.
With a weak economy, student-debt that has outgrown credit card debt, and having watched their parents struggle through the housing crash, many young workers are not enthusiastic about owning a home. Renting is becoming the new norm among a recuperating labor force.
The numbers reflect that change in attitude. Despite rents being so high, San Francisco has a vacancy rate of just 3.7%.
In New York, the vacancy rate dropped to levels not seen since mid-2008, even though rents have increased over 5 consecutive quarters.
Those high rent prices mean one thing: landlords are making money again.
After a couple years of stagnation, the real-estate market is starting to correct itself. The trend of high rent prices and low vacancies will continue until renters decide it makes more sense to buy. Once that happens, the market will level out. But we are still years from that.
Being a landlord is no longer bad business. And if these trends continue, the rental market has just started growing. Business is only getting better.
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