Renters: Is It All Doom and Gloom in Your Future?

Are you a renter? Millions of people are these days and the numbers have been climbing now for several years as those who had returned home to live with mom and dad have now decided to get out and live on their own. They are finding new living quarters, but there’s a real problem here and its roots go back to the housing crisis of 2008-2009. Because of it, renters may face doom and gloom in their financial future!

Renter in his apartment looking sad representing renters concerned about increasing rent

What Are Rents Right Now?

The average monthly asking price for rent in the U.S. increased over 15% year over year to a record high of $1,900/month, according to a new report from Redfin. To make matters worse, the national median monthly mortgage payment also climbed 31% to $1,716, also the biggest increase on record.

Whenever the cost of homeownership increases, many potential homebuyers opt to rent instead, which drives up rental prices. That means you need to brace yourself for continued inflation across the board here and try to find ways to offset these living costs.

But there’s more to the complications. You won’t be saving on housing costs just by purchasing a home and then paying a monthly mortgage for the next 15 or 30 years either. Mortgage rates are climbing right now and are targeted to hit 5% and then 6%, perhaps as soon as a year from now as the Fed increases the key interest rates over that time.

Why Are Rents Climbing so High?

When the market is overflowing with potential renters, younger workers become less demanding in requiring ideal living situations. Why? It’s because it’s too hard to find better, affordable homes to rent. That puts landlords in the driver’s seat and makes it easier to provide less quality for more money, locked into a lease. There are still ways to score a deal on rent even in this tight market, if you’re willing to compromise. We’ll get to that part below.

“Where Do I Live?” Limbo Land

During the height of the pandemic, people got used to or changed their pattern of living and stayed where they were rather than move around as normal. With a small market choice due to the lack of new construction over the past decade, that was probably a good thing. But now, things have changed and people, younger and older, are moving and often for completely different reasons.

First of all, younger folks and many millennials have entered the housing market thinking they can buy easily rent or buy a home like what they see on Instagram and HGTV. But when they find out they can’t afford to rent or purchase the kind of house they want, they must wind up renting.

Rental vacancies have reached generational lows with less than 6% of all rentals nationally available by the second half of 2021. That is the lowest availability rate since the early 1980s. Rents then soared because of simple supply-and-demand economics. Combine that with inflated construction costs—higher lumber prices alone added $92 per month on rent for new units between April 2020 and July 2021—and you can see how we got here.

The Baby Boomer Sell-Off

Another reason rents are soaring is that boomers are selling their homes. They’re cashing out and moving on into newer luxury rentals. That’s adding to the number of wannabe renters without adding any more units for rent.

In total, rents on newly signed leases surged nearly 13% in the last quarter of 2021, compared to what the prior tenants paid.

Salaries Are Up So Rentals Are Up Too!

Higher earners represent the biggest pool of renters today. Developers keep building more expensive units that appeal to them. Millennials especially want to live in higher quality housing in more desirable locations.

But the data shows that despite these higher expectations, millennials earn more but have significantly less money than their parents, for rent or buying. They spend on everything and housing isn’t the priority it should be.

That means that people who would normally buy homes are trapped in the rental market, lowering vacancies even further and driving rental prices even higher.

Is That Old Rental Formula History?

How much of your income should you set aside for rent? The old rule of thumb is now being re-examined. Does the 30% rule for measuring rental cost still make sense?

Those who pay more than 30% of their income for housing may have difficulty affording necessities such as food, clothing, transportation, and medical care. Severe rent burden is defined as paying more than 50% of one’s income on rent.

The 30% percent rule—that a household should spend no more than 30% percent of its income on housing costs—has long been accepted in family budgeting. But it may be just wishful thinking these days.

Depending on where you live and how much you earn, the rental portion of your income may make sense or not, or even be impossible.

Back in 1973 I Thought I Had It Made Renting an Apartment!

I got married in 1973 and my first wife and I moved into our very first apartment here in New Jersey. The rent was $155 a month. I was the only one working at the time (she was trying to find a teaching job, not easy back then) and I was earning $7,200 a year as a trainee at R.H. Macy’s. That made my rent under the 30% rule by quite a lot. But today, it looks way different.

Living in San Francisco? $4,000 a month for a rental means your salary needs to approach $150,000 annually. Living here in NJ, a typical one bedroom apartment is going for about $1,250 a month. That translates, using the 30% rule, to an income of $45,000 annually. But all of that depends whether you live in the inner city or suburbia, in older buildings or newer luxury apartments. And one other important item is that if you are just starting out, your income may not be at the $45K level just yet.

Doing some quick math on my 1973 apartment, rents are up about 800% and salaries at Macy’s are up about 650% over the past 50 years.

What Can You Do About High Rents Right Now?

First, make sure any rental increase you get is legal. A tenant should keep track of every correspondence they receive and take notes when communication is verbal, and even keep track of the dates of each communication.

Landlords can’t just raise your rent whenever they feel like it. They have to wait until your lease is going to expire, unless there are specific provisions in the lease to raise the rent. So make sure you actually have a lease and that it is signed.

Next, renters must be granted at least 30 days’ notice before any rent increase is enforced, although that can vary based on how much the rent will actually go up. In California, for instance, that advance notice expands to 60 days if the increase is more than 10% of the rent. Learn about state and municipal laws that may regulate your rent.

Renters expect rent increases when leases expire, but you can’t be punished by a landlord with huge increases just because they want to do it. Your rights will be protected from that.

That means that a multi-year lease with a set rent is a good way to stop year-to-year increases, as long as you know you’ll be staying for the duration.

Negotiation?

You know I believe that almost anything can be negotiated. Rentals are no exception.

If you are a long-term tenant and a good one, try negotiating smaller increases or extended terms with more gradual increases. A good tenant is sometimes hard to find and a future unknown tenant is a risk landlords don’t like to take. Subtle hints that rent increases may mean you might have to look elsewhere go a long way in many cases.

Final Thoughts

Renting is a must for some and although it will never directly build your wealth, under some conditions it can free up extra cash for you to then try and build wealth. Taking in a roommate and sharing expenses is one way to do that.

Make good deals and be prepared for rental increases by earning more, budgeting well, and having alternate income streams to fight it.

There was and still is an old saying about never living in the most expensive or the cheapest place in town and that can at least make living conditions attractive and not bust your wallet when you do. Do you really need all those amenities that you pay for when you never use them? Think about that when you are looking for rentals.

Rents may be going up, but not all renters have to suffer. Are you a renter and are you prepared for rent increases?

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