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Why Demand for Rentals Will Likely Rise in 2019

October 17, 2018 | By: BiggerPockets | 2

No matter which direction the market heads in the new year, demand for rental units is only likely to rise in 2019.

Some are bullish on the market continuing to stay strong, though growth may be more moderate, with the fastest traction moving to new cities and suburbs. Others say their markets are already in correction territory and expect that to deepen in the next few years. Both could be more problematic for house flippers, speculative builders, and those in ultra-prime locations that already have extremely lean yields. While I haven’t personally experienced the latter in the markets I work in, either way, 2019 is likely to be a great year for landlords who are making smart acquisitions and demand for their units.

The Need for Affordable Housing

If house prices keep on marching up, America’s affordability crisis is only going to intensify. A report from Smart Asset says you’d need to earn over $73,000 per year to be able to afford an average apartment in America’s top 10 cities. You’d need to make close to $100,000 a year to live in what most would consider inexpensive Chicago, IL. You’d need to make well over $100,000 a year to live in a desirable location within San Francisco.

Nationally, the Out of Reach report published by Fast Company says you need to earn at least $22.50 an hour to afford an average 2-bedroom apartment in America. Many Americans might argue it takes a lot more than that. Also consider the same report only highlights three classes of jobs that earn enough to pay this rent. Those are registered nurses, software developers, and general managers. Top executives, self-employed business owners, and real estate investors probably make more—though most aren’t going to want to settle for a decent 2-bedroom apartment after all the work they’ve put in to get to that level.

Market Trends

With these high rents, it is almost impossible for most Americans to save a down payment to buy. On top of this, interest rates are going up. That is making the same homes even more expensive, even if house prices don’t rise or only fall modestly. Fewer buyers will qualify for home loans.

So, more people will have to rent, right when Generation Z is beginning to hit the market and are needing their own housing.

The Need for Housing

While affordable housing is a nice to have, everyone needs shelter. If the housing market starts to decline, not only will we have both new generations desperate for housing and seniors who are selling up and downsizing, but many could lose their homes again as well.

If people become fearful of homeownership, more will sell cheap to try and cash out any equity they have. Those who can’t sell fast enough may end up underwater. Housing affects the wider economy too. That can hurt jobs and interrupt incomes.

So, what you have in a decline is fewer people who can and want to buy homes—and more people who are exiting ownership and desperately need somewhere to live. If they can’t buy, they have to rent.

Summary

Whichever direction house prices go in 2019, it’s only likely to lead to more demand for renting. While the economy may ultimately cap how high rents can go, more demand is going to help landlords keep up rental rates and have greater choice over the quality of tenants they accept or the terms they can ask. If you’re concerned about your house flipping business or if you’re developing condos or spec homes, this might be the year to move to or add rentals into the mix.

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