Will Rent Prices Finally Cool Down? Key Indicator Offers Hope, But Major Cities Remain Unaffordable

With the median American tenant paying $2,147 in rent, according to Zillow data, residents are desperately hoping for a drop in rent prices that could come if home vacancies rise.

As per U.S. census data, more than half of U.S. renters pay over 30% of their income in rent, crossing the line where rental units stop being considered affordable.

The situation is prompting renters to remain in their rental units for extended periods, aiming to minimize rent increases. This trend is also a result of historically high mortgage rates, which are deterring tenants from securing loans for their first homes.

The measures, however, change drastically depending on the location. New York City continues to be one of the less affordable locations for tenants, with workers that earn as much as $135,000 a year still unable to afford 65% of the city's available properties.

In California, large cities are seeing a decline in annual rental rates. Annually, Oakland was down 9.1%, Sacramento dropped 8.1% and Los Angeles declined 5%.

Read also: US Home Prices Hit All-Time Highs, Fastest Growth Rate In A Year: ‘We’ve Witnessed Records Repeatedly Break’

Will Rents Cool Down?

The vacancy rate is a key measure to look at when trying to assess the course of rental prices.

A higher number of vacant homes puts pressure on landlords to drop prices in order to find tenants for their empty properties.

According to data from the St. Louis Fed, vacancies across the country during the first quarter of 2024 came in at a rate of 6.6%, the same as the two previous quarters and higher than any other period since mid-2021.

This measure is higher than the annual averages for 2020, 2021, 2022 and 2023.

While vacancies across the country have not declined in recent months, they remain below the historical national average, which has been 7.3% since 1956.

The level of vacancies varies greatly between states.

"Western and Northeastern states have the lowest rental vacancy rates in the country, accounting for 14 out of 15 states with the lowest vacancy rates—all of which have rental vacancy rates of 4.9% or lower," according to a Monday report by Construction Coverage, which looked at the most recent data on housing vacancies and rent prices across the country.

The highest vacancy rates are in Southern and Midwestern states, where 14 of the 15 states with the highest rental vacancy rates are located.

A rise in construction could help bring rent prices down since the market is injected with new supply of available homes, which increase vacancies.

Housing starts, a measure that looks at how many projects began construction in a given period of time, saw a slight uptick in April, but 2023 and 2022 averages were below 2021 levels and this year doesn't look to be leading up to breaking recent records.

If the Fed begins cutting down interest rates this year, more tenants would leave their contracts for a first home, increasing the number of vacant properties.

Arkansas, Indiana, South Carolina, Alabama and Texas are the states with the highest rate of vacant homes, all above 9%.

Massachusetts, Maine, New Jersey, Vermont and Kentucky have the lowest rate of vacancies, all at 3.5% or below.

Median rent prices have shown an uptick this year so far, as per Zillow, after a drop that lasted the entire second half of 2023. Prices could start to cool down again if vacancies continue to grow or remain higher than in previous years.

The largest ETFs following the real estate sector are Vanguard Real Estate Index Fund ETF VNQ, Schwab US REIT ETF SCHH and Real Estate Select Sector SPDR Fund XLRE.

Now read: Home Sellers Slashing Prices At Fastest Rate In Nearly Two Years: What’s Going On?

Image generated using artificial intelligence via Midjourney.