Rent prices have outrun inflation for years. In the last decade alone, apartment rental costs have risen by 150% and until recently, there was no end in sight for this unprecedented increase.
Now, because of the coronavirus, it's finally beginning to go down. This decrease is especially notable in big cities, where the average monthly rent is at least $3,000 or more. How, exactly, has COVID-19 managed to burst the bubble?
Declining Tourism and High Unemployment
The coronavirus has taken a major toll on areas like Las Vegas and New York City that rely heavily on tourism. As fewer people are staying in the area there is a huge decline in demand, especially for short-term rentals. Moreover, fewer visitors means a decrease in renting long-term — both now and in the future.
Landlords are also fighting to keep renters, in some cases enticing them to renew their leases with lower rates. However, high unemployment means tenants are receiving little to no income, making even low rates unaffordable for many. This will likely lead to an increase in vacancies and a continued downward spiral in rental prices.
Some Airbnb hosts are also planning to close or convert their units as a result of the travel ban and a lack of tourism. Instead of listing them as short-term rentals on the app, they'll open them to long-term renters.
This could increase rental supply and depress costs, even though Airbnbs account for less than 1% of the housing market in major cities. As hosts lower their rates and begin attracting long-term renters, apartments and similar multifamily units look to do the same to stay competitive.
Regardless, many families simply don't have the money to rent — even at a low rate. Thus, many will move in with family or friends in hopes of saving during the pandemic.
A Shaken Housing Market
Of course, changing rental rates are also connected to the housing market. To attract buyers, sellers have slashed home prices, and mortgage rates are at all-time lows. A few weeks ago, interest rates for 30-year fixed mortgages hit 3.23%. Meanwhile, 15-year fixed rates dropped to 2.73% — just a few points above the record low of 2.56%.
These low rates have encouraged many to refinance their mortgage. Typically, it's not worth the money to refinance unless you can secure at least a 2% lower interest rate. However, since these are the lowest rates in more than a decade, homeowners and landlords may want to take advantage of the drop.
Thus, while fewer people may be buying and selling homes right now, more are refinancing. This includes smaller landlords who may have mortgages out on their rental properties — if they believe they can find a lower interest rate, it gives investors more flexibility in a struggling rental market.
Rethinking Urban vs. Suburban Living
As quarantine and social distancing continue on, rent and mortgage rates will inevitably remain low — at least until the economy begins to recover.
Migrating to the City
When quarantine finally lifts, lower rental rates may result in density pressure in large cities like San Francisco, Chicago and similar areas. In this case, some experts think people living in suburban areas might move to urban apartments to enjoy affordable city living.
Moreover, cheaper units may attract people from across the country. Thus, the market may experience a huge migration soon after quarantine lifts as people seek to sign leases and lock in cheaper rental prices.
Shifting to the Suburbs
On the other hand, people who have lived in metropolitan areas closest to city centers may begin to rethink purchasing a house in the suburbs. After all, with home prices and mortgage rates as low as they are, some might want to take advantage of the situation before the market fully recovers.
High-income city dwellers might also consider moving to the suburbs if their employer shifts to remote work permanently. In this case, there would be little need for them to rent in urban areas, especially as prices may increase from year to year eventually.
Additionally, those sharing rooms or apartments might lose a taste for the lifestyle after social distancing. For these people, living alone in the suburbs might be much more enticing after this pandemic.
Disruption in the Rental Market
As far as long-term impacts, the pandemic's effect on the rental and housing market is simply too unpredictable. While higher-income populations may look to purchase homes, those with low incomes might downgrade as they face economic instability. For now, the market will continue to struggle through a temporary bout of disruption until the economy recovers.
Holly Welles is a real estate writer and the editor of The Estate Update. She covers real estate investment, apartment living and personal finance for publications across the web.
*Contributions are solely guest opinions and don’t reflect the opinions of or are endorsed by WYL, our staff, clients or other interested parties.