For the past few years, a major theme in housing has been rapid rental growth, and the largely negative impacts that is having on the housing market on everything from homeownership rates to affordability. But over the next year, there is – some – relief in sight.
For the past few years, a major theme in housing has been rapid rental growth, and the largely negative impacts that is having on the housing market on everything from homeownership rates to affordability. But over the next year, there is – some – relief in sight.
As of December, median U.S. rents grew at a 3.3 percent annual pace, to $1,381 per month, according to the Zillow Rent Index. That pace of growth is forecasted to slow to 1.1 percent nationwide by December 2016, rising to $1,396 per month, according to the newly released Zillow Rent Forecast (figure 1). After years of struggling to meet rampant demand from renters young and old, apartment developers have ramped up in a number of large U.S. markets. Enough new units have now been brought online to help blunt some of the rental appreciation we’ve been seeing.
Dozens of cranes dotting the skylines of cities from Seattle to Washington, D.C., are a testament to the efforts of builders to bring more apartments (albeit mostly at the high end) to the market. And as more units come online, the vacancy rate within principal cities is rising – if only modestly, according to the Census Bureau – reflecting this new supply and helping keep rent increases in check. Even in cities like Denver – where rents are both growing rapidly currently (up 8.7 percent year-over-year in December, almost triple the national average) and are expected to keep growing robustly (by 4 percent in 2016) – landlords are offering more concessions to their tenants in a bid to keep vacancy rates low.
And in some markets, rents may actually go down in 2016 – likely the result of relatively weak demand and sluggish local economies with limited job growth, combined with some new supply coming on line. Large markets where renters could expect their rents to fall this year include Indianapolis (median rent expected to fall 3.6 percent in 2016), Oklahoma City (-1.8 percent) and Las Vegas (-1.8 percent).
The slowdown in rental growth will undoubtedly provide some welcome relief for renters who’ve been experiencing sometimes dramatic rent increases every single year for the past few years. But make no mistake – even with the slowdown in rental appreciation, rents will keep rising and will remain unaffordable in many of the major markets across the U.S., especially on the West Coast.
Renters in San Francisco and Los Angeles, for example, can currently expect to spend more than 40 percent of their income on a rental payment, and its not as though rents are expected to go down in those markets this year. To the contrary, median rents in L.A. are expected rise 2.8 percent in 2016 and 5.9 percent in San Francisco – both well above the national forecast.
And while the expected slowdown is significant nationally, in some local markets, rental growth will just barely cool off. In Miami, for example, rents are currently growing at a 3.9 percent annual pace. Over the next year, that pace is expected to slow by just 0.4 percentage points, to 3.5 percent. In San Jose, rents are currently growing by 8.9 percent year-over-year, with growth slowing to a still-hot 7.8 percent annual pace over the course of 2016.
Those are hardly large enough slowdowns to make much of a meaningful difference to renters struggling with affordability in those areas.
In December, the median U.S. home was worth $183,500, according to the Zillow Home Value Index, up 0.2 percent from November and 4 percent from December 2014 (figure 2). Annual home value growth was consistent in all three months of the fourth quarter, growing at 4 percent in October, November and December, an indicator of increased stability in the housing market after several years of wild up and down swings.
Home values in 25 of the nation’s 35 largest metro markets grew faster year-over-year than the nation’s 4 percent annual pace in December. Home values grew by more than 10 percent per year in six of those large metro markets: Denver (up 15.2 percent year-over-year), Dallas (14 percent), San Jose (12.9 percent), Portland (12.4 percent), San Francisco (12.3 percent) and Miami (10.4 percent). None of the nation’s largest metros experienced annual home value declines in December.
Nationwide, home values remain 6.4 percent below their pre-recession, May 2007 peak of $196,100. But in 11 of the 35 largest metro markets, median home values have never been higher, having surpassed their recession-era peaks. These markets include: Pittsburgh, Charlotte, Columbus (Ohio), San Antonio, Houston, Austin, San Francisco, Portland (Oregon), San Jose, Dallas-Fort Worth and Denver. Median home values in the Boston area ($382,900 as of December) are a scant 0.5 percent below their September 2005 peak of $384,900.
The U.S. median rent in December was $1,381 per month, flat from November and up 3.3 percent from December 2014. U.S. rents have grown year-over-year for 40 consecutive months (figure 3).
Median rents in all 35 of the nation’s largest metro markets grew year-over-year to some extent, though a dozen experienced modest month-over-month declines in rent, while two more were flat from November. Rents grew fastest year-over-year in the San Francisco (up 12.5 percent from December 2014), Portland (up 9.7 percent) and San Jose (up 8.9 percent) metros.
Hot rental markets are still going to be hot in 2016, but rents won’t rise as quickly as they have been. The slowdown in rental appreciation will provide some relief for renters who’ve been seeing their rents rise dramatically every single year for the past few years. But the situation remains tough on the ground: rents are still rising and renters are struggling to keep up.
Trendy tech centers like San Francisco, Seattle and Denver hogged the spotlight in 2015. And while those markets will continue to thrive this year, the markets that shine brightest will be those that manage to strike a good balance between strong income growth, low unemployment and solid home value appreciation. As the job market continues to hum and opportunity becomes more widespread, the best housing markets in 2016 will no longer limited to the coasts or one-industry tech towns. This year’s hottest markets – including markets as diverse as Omaha, Boise and Richmond – will have something for everyone, whether they’re looking for somewhere to raise a family or start their career.
