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posted on 05 September 2016

Have Apartment Rentals Topped Out?

Written by

It's certainly no secret that in many of the nations housing markets the price to rent an apartment has been going in one direction...up! According to Department of Numbers (using Census ACS survey), the average rent for the U.S. has increased by $98 (11%) from 2005 to 2014, adjusted for inflation. The rate of increase in 2014 alone was almost 30% of that (3.4%). And 2015 was even bigger (4.6%), followed by another 4.4% through July 2016.

arrow.up.380x170

That means that the rise of the average rent for the 31 months starting January 2014 was almost 13% compared to less than 8% for all of the 9 years before 2014.

What had been rising at less than 1% a year suddenly bubbled up to more than 3.5% annual rate of growth.

But, as the famous phrase about gravity suggests, what goes up must eventually come down.

Click for larger image.

After all, whether it was tulips during the 1600's, technology stocks during the late 1990's or real estate prices during the early 2000's it's a fact that nothing goes up (or down) in a straight line forever.

The trick, however, as any investor knows, is to have a well-reasoned idea as to whether a pullback is merely the pause that refreshes or the deflating of a bubble in which case you do not want to be the one 'catching the falling knife'!

Recognizing this difference takes work and not simply listening to the advice of pundits and analysts who will typically have a vested interest in prices continuing to rise.

But I digress.

From the graphic earlier in this article it's apparent that the cost to rent an apartment in many cities around the country has risen to nosebleed levels.

By the same token, anyone who follows real estate or who merely looks-up at the sky in some cities and sees construction cranes everywhere, it's also apparent that new units will be coming onto the market in a big way.

Economics 101

Supply and Demand: Economics 101 says that increased supply coupled with demand that may not be increasing at the same rate means that prices will typically drop in order to get deals done. In places like the New York City borough Manhattan, that may now be the case.

Elastic vs. Inelastic Demand: Economics 101 also looks at a concept known as theelasticity of demand.

Basically demand is considered inelastic if a change in price does not affect the amount of that product sold. This phenomenon describes the apartment rental markets around the country for many years.

Note: The sad truth, however, is that to maintain the demand consumers might have had to adjust to upward changes in price by utilizing techniques such as cramming 3 people into a space designed for 1 or 2.

But of course there will come a time when an increase in price does affect demand and, it is possible that we are seeing that economic theory occur realtime in places like New York City and San Francisco.

Apartment Rent Trends

These charts graphically show the recent direction in rents around the country and the price action in specific cities...

So where do apartment rents go from here? We will all have to just wait and see!

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