Three Predictions For The Rental And Housing Market In 2021
Founder and CEO of Rentec Direct, property management software for real estate professionals.
Perhaps the only certain thing about 2020 is all of the uncertainty surrounding us. Experts across the board are struggling to make predictions as to what recovery will look like post-pandemic. The real estate industry and housing market have experienced some of the biggest highs and lows of any sector. While home sale prices and activity have hit record highs in some areas, landlords and renters across the country have been struggling to make ends meet, despite federal legislation and private programs put in place for their protection.
As of November, data aggregated from over 600,000 rentals in the U.S. shows a nearly 30% drop in rent payments received compared to the same period in March — before the pandemic hit. While the federal and state legislation put in place as a result of the pandemic has been critical to protecting tenants struggling with widespread layoffs and income loss, an unfortunate side effect is that these regulations are inhibiting the natural course of the move-in, move-out and eviction cycle that the housing and rental market would otherwise experience. My experience as a landlord, real estate investor and founder of a company focused on property management leads me to believe we’re dealing with unnatural inflation of housing needs that the nation has never experienced before — which could cause another housing crisis similar to the 2008 housing market crash.
Low vacancy rates are contributing to higher rental rates.
Let’s use the fictional Smith family as an example. Like many families, the pandemic has caused them to reconsider their metropolitan home, and they’ve decided to relocate to a more rural area for improved quality of life. The Smith family sells their home easily thanks to low supply and high demand, with the intent to rent in their new town until they find a new home to purchase.
The only issue? There are little to no rentals available on the market. In my hometown, the vacancy rate is the closest to zero I’ve seen in 30 plus years. Because the Smith family just sold their home in a desirable market, they have the means to pay premium rates for any rentals that do become available. What may normally rent for $1,500 per month is currently being listed at $2,000 per month. The Smith family can afford this and takes the rental, which leaves another working-class family from, perhaps, a less affluent area unable to afford the rent inflation and find a home.
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Eviction moratoriums are creating inflated occupancy rates.
State-imposed eviction moratoriums have allowed tenants to stay in their rentals for nearly a year now, whether or not they are paying the rent. This is helpful for renters struggling with income loss, but definitely a disruption of the natural eviction cycle. Units that would historically become available if a tenant could no longer afford the rent are now remaining occupied, having a cascading effect that lowers vacancy rates dramatically. Even the most qualified renters are struggling to find vacant rentals.
When eviction moratoriums are lifted, the rental market will change.
Given the current state of the pandemic in the United States, it’s likely that eviction moratoriums will be extended past their current Dec. 31 deadline. As eviction moratoriums continue and vacancy rates remain dismally low, the lack of supply coupled with high demand will cause both rental rates and home prices to continue to climb.
When eviction moratoriums are lifted and landlords begin to pursue eviction for nonpayment of rent, it’s not unlikely that we will see a housing market crash. Tenants who have been unable to pay rent will be tens of thousands of dollars in debt to their landlords, who themselves may have been forced to defer or default on their mortgage payments. The rental market could be flooded with vacancies as supply reenters the market, which means property values and rental rates could drop overnight. All of these factors could contribute to a drastic housing market crash.
During the 2008 housing crisis, we saw homes lose 30% of their value, 401(k)s vanish, and hundreds of thousands of Americans lose their homes. It’s nearly impossible to say what will happen when the Covid-19 dust settles as the world has never faced a challenge quite like this in the past.
Throughout 2020 our nation has struggled to find the balance between keeping Americans safe and healthy and keeping the economy safe and healthy. At the end of the day, in order for the housing market to return to normal, the natural cycle of turnover needs to return. This will require unemployment rates to drop down to closer to pre-pandemic levels, so renters can pay their rent as they normally would. All of us in the real estate space will be watching the market closely to see how trends continue to unfold into the new year.
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