The Rental Market is Changing: What Does This Mean for The Investors?

Nothing goes up forever. Property owners found that out this year as sales prices plateaued and then started dropping. Now it appears the same is happening with rents.

With the headline "Rents Fall for the First Time Since Late 2020", shivers went down spines as investors and landlords.

Average rent prices are falling nationwide, and it's likely to continue. "We're not seeing rents go up as quickly; the rental market is softening a little bit," Christopher Mayer, a professor of real estate from Columbia Business School, said.

As much as it's excellent news for renters, it's horrible news for investors. What can you do?

The Concerning Nationwide Rent Decline in Major Cities

Redfin reports that the national average rent price was up 11% year-over-year to $2,039 today. If you put it up against years before, this figure is the smallest annual increase in a year, down from a 19% gain back in March.

Moreover, even on a month-on-month growth, the median rent inched by 0.4% only—the slowest growth since December 2021 and a significant drop from the 1.6% increase a year before.

Source: Redfin

Taylor Marr, Redfin’s Deputy Chief Economist, chimed in, “Rent growth will likely slow further as the Federal Reserve continues to raise interest rates. Higher interest rates impact the rental market because they put a damper on spending power in the economy as a whole, including renters’ budgets.”

“Growth in rents is also likely to be slowed by a boost in rental supply. There are nearly a million rental units under construction that will hit the market in the coming months and years,” he concluded.

The Rent Trends in the Metro Detroit Housing Market

Zooming closer to the City of Detroit, Michigan's Motor City went through several market shifts before all this went down. Before the pandemic, the Detroit market experienced a shortage of housing inventory that led to buying competition and a spike in property prices. Then COVID entered the world, and the market came to a standstill—although it was temporary.

The market started roaring, with interest rates dropping and remote working becoming the norm. As a result, prices soared, and the competition intensified among homebuyers. However, it didn't last long, as the market is now cooling off, due to rising interest rates and concerns about the economy's stability.

Plus, there's still a shortage of affordable housing, especially with new construction slowing down.

Anika Goss, the executive director of Detroit Future City, says, "During the pandemic... people living in the bottom quadrant of the income scale were not being supported. If rent softens and people are back to work in 2022, we might see an evening out in a year or two years."

Data shows that "Detroit" is one of the many major US markets that saw a decline in rent averages the past month.

Source: Apartments.com

It should be noted that usually when “Detroit” is mentioned, it’s a reference to the federal designation of Metro Statistical Area (MSA), which covers the city of Detroit, Dearborn & Warren. So, it ignores the more affluent local areas in Macomb, Oakland & Wayne counties.

On the other hand, if we look at Zillow’s data, the City of Detroit actually saw an increase in average rent recently, where investors are charging Detroiters $20 more than last this time last year:

Source: Zillow

“Gas prices are coming back down, but rents are going up 10, 12, 15%. And rent can end up taking 40% of these households’ income,” Bank of America CEO Brian Moynihan recently said.

The Rent Price Dance Between Investors and Tenants

So, what does all this mean for Metro Detroit landlords? Well, it still appears to be a landlord's market in Metro Detroit, with rents still increasing even as the economy falters. Of course, if the economy continues its current recessionary path, eventually rental prices will drop, just as housing prices recently have.

Who’ll be affected the most? Tenants living paycheck-to-paycheck with no capacity to absorb increased food & energy costs, much lower rents. So, owners of Class C & D rentals will be affected first and probably the most.

These owners might want to consider holding off on rent increases for their best tenants to keep them in their properties and paying rent. When filling vacancies they should focus on the employment stability of applicants and even evaluate the stability of the employer.

With careful screening and keeping an eye on the economy, you can ensure that your rental properties remain profitable. Remember, your goal is to have tenants that can pay their rent and provide you with a healthy return on your investment.

Do you need more help in Metro Detroit? Get in touch with our team!

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