After two years of topsy-turvy pricing trends, home price and rent appreciation have finally caught up with each other — a signal that “permanently higher” housing costs will be the name of the game for buyers and renters alike.
“Given that pandemic housing trends are mostly preexisting trends accelerated, it’s possible home prices and rents would have risen to levels similar to where they are now even without the pandemic,” OJO Labs explained in its latest housing study released Thursday. “It would have happened more evenly and more slowly. But looking ahead, it’s hard to conclude anything other than housing costs are going to be permanently higher moving forward.”
Shortly after the first round of lockdowns, the housing market experienced unprecedented price growth as inventory levels reached record-lows and favorable mortgage rates pushed buyer demand to record-highs. As a result, the average home price has increased a whopping 25 percent since March 2020; a reflection of the fierce competition and bidding wars that shot prices up to untenable levels.
However, average rental prices remained “relatively flat,” OJO explained, as wealthier households left urban centers for the opportunity to purchase a home in cheaper pastures, and other renters were unable to break their leases. The decrease in demand led to softening rent prices in places such as New York City, San Francisco, Boston, Miami, Seattle and Philadelphia.
New York City and San Francisco experienced the most dramatic rent drops, with the median rent for a one-bedroom unit decreasing 23.1 percent and 19.1 percent, respectively, from January 2019 to January 2021. At the same time, the median home price in those locales increased as much as 53 percent — a reversal of previous trends that saw rental and for-sale prices increasing at similar rates.
Meanwhile, rents continued to increase in historically affordable markets, albeit at a slower rate than before the start of the pandemic.
“In low-density areas where the majority of residents live in single-family suburbs outside of the city center, rent either stayed flat or rose modestly at the beginning of the pandemic when home prices started rising dramatically,” the study read.
OJO singled out Austin and Atlanta as examples of this trend. In summer 2021, the median home price in Austin was up 54.3 percent from January 2019, but the median one-bedroom rent was only up 10.7 percent. Over in Atlanta, the median home price was up 41.1 percent from January 2019, but the median one-bedroom rent was only up 6.3 percent.
“First, swings in the home sales market have happened unusually fast—once at the beginning of the pandemic when there was a rush of demand into the market, then again in the spring of 2021 after the COVID-19 vaccine was widely available,” the study explained. “Renters generally are not able to move that fast because they have to wait for their lease to expire, meaning the landlord has to wait to raise rent in response to rising home prices.”
However as the for-sale market began normalizing in mid-2021, median rent prices took a dramatic turn upward. By August, the median rent in Austin and Atlanta had increased a whopping 25.1 percent and 24.1 percent, respectively, from 2019. New York City experienced a similar rebound with median rent prices rising 14 percent from 2019.
OJO said the market will continue to correct, as home price growth cools and rents rise — bringing them back to similar levels of growth. However, continued inventory shortages in both markets will keep buyers and renters on their feet as they attempt to keep up with skyrocketing housing costs.
“The torrid pace at which rent is rising seems unsustainable, but if rent hikes are in fact a delayed correction related to home prices, then it’s likely rent will continue to rise substantially in the near-term,” the study concluded. “After that, they might level off as home prices have, and then moving forward we’d see home prices and rent move in lockstep as they have historically.”
“However, if demand continues to outpace supply, as it has for much of the last decade, then rent could rise significantly for the foreseeable future.”