...
Are We Entering a Landlord-Friendly Market? Understanding the Shifting Rental Landscape
As housing affordability continues to decline and mortgage rates remain high, the rental market is undergoing a transformation. According to the Wall Street Journal, real estate experts predict a shift from a renter-friendly environment to a landlord-friendly market in the coming months. With limited new construction, rising demand, and persistent inflation, landlords may soon find themselves in a stronger position.
Why Landlords Are Gaining the Upper Hand
One of the biggest drivers of this shift is the ongoing affordability crisis in homeownership. Mortgage rates have surged in recent years, pricing many would-be buyers out of the market and forcing them to remain renters. Compounding the issue, the pipeline for new construction is drying up. By the end of 2024, housing supply constraints will likely push rental demand higher, leading to steady rent increases nationwide in 2025.
Lee Everett, head of research and strategy at Cortland, a leading multifamily real estate firm, told the Wall Street Journal that the power dynamic is shifting:
“We’re seeing a reversal, with landlords gaining more control over pricing as demand outpaces supply.”
Inflation and Interest Rates: A Double-Edged Sword
Persistent inflation has also played a key role in reshaping the rental market. The Federal Reserve’s goal of reducing inflation to 2% remains elusive, with housing costs serving as a major obstacle. Lisa Sturtevant, chief economist at Bright MLS, noted that until housing costs stabilize, interest rate cuts will remain unlikely. This means borrowing costs will stay elevated, further discouraging homeownership and strengthening the rental market.
Where Rents Are Rising the Fastest
Rental markets across the country are experiencing different levels of growth, with some regions seeing extreme price surges. A report from HUD and ConstructionCoverage.com identified the states with the highest projected rent increases for 2025:
- Montana and Idaho: Over 20% year-over-year rent growth, more than four times the national average.
- Virginia: Projected rent increase of 11.6%.
- Tennessee: Forecasted rent growth of 10.7%.
- Hawaii: Expected rent increase of 9.2%.
On a metropolitan level, certain cities are facing even more dramatic increases. Bozeman, Montana, is expected to see rent prices climb 37.4% in 2025, while Boise, Idaho, is set to experience a 32.1% increase.
The reasons behind these surges vary, but in states like Montana, a combination of low housing inventory and a wave of new residents has created a severe affordability crisis. According to local reports, 80% of Montana homeowners have mortgage rates that are 2% to 3% below current rates, making them reluctant to sell and further tightening supply.
What This Means for Renters and Investors
While some regions experience rapid rental growth, other markets are seeing stabilization or even slight declines due to overbuilding. CRE Daily, using data from RealPage, identified how different regions will perform in 2025:
- Strong Rent Growth Expected: Chicago, Cincinnati, Indianapolis, Kansas City, Pittsburgh, and Virginia Beach will continue to see rent increases due to steady demand and limited new construction.
- Coastal Markets Returning to Historical Norms: Boston, San Francisco, and Seattle will see moderate rent growth of 3-4%, aligning with long-term trends.
- Modest Rent Growth Areas: Baltimore, Philadelphia, Cleveland, and Milwaukee will experience slow but steady rent appreciation.
- Stabilizing Sunbelt Markets: Dallas, Houston, Las Vegas, Orlando, and Miami will see rent growth between 1.5-2.5% as the market adjusts after years of rapid expansion.
- Weaker Rental Markets: Atlanta, Los Angeles, San Diego, and Minneapolis may see rental growth under 2% due to increased supply and slower demand.
- Oversupplied Markets at Risk of Declines: Cities like Austin, Phoenix, San Antonio, Raleigh, and Charlotte may experience neutral or negative rent growth due to excess inventory.
The Role of Construction Costs and Supply Chain Issues
An important unknown factor in the future of rental prices is the cost of construction and housing supply policies. If tariffs on building materials continue and undocumented labor in construction declines, the cost of new housing developments could rise, limiting new supply and further increasing rents.
According to the National Association of Home Builders (NAHB), the U.S. imports 70% of its building materials from Canada and Mexico. Additionally, about 13% of construction labor comes from undocumented workers. If labor shortages and higher material costs persist, developers may delay or cancel projects, further tightening rental supply.
Is Now a Good Time to Invest in Rental Properties?
The current market presents both opportunities and challenges for investors. High mortgage rates have made homeownership less accessible, increasing the number of long-term renters. However, purchasing real estate at today’s high interest rates can be risky, especially for smaller investors who rely on cash flow.
For experienced investors with access to capital, buying and holding rental properties could be a lucrative long-term strategy. As rental prices rise and interest rates potentially drop in the future, landlords who lock in deals today may benefit from future refinancing opportunities.
However, smaller investors should exercise caution. Entering the market without adequate financial reserves can be risky, especially if vacancies rise or unexpected maintenance costs emerge.
Final Thoughts: What to Expect Moving Forward
The rental market is shifting, and landlords may soon find themselves in a more advantageous position. Tightening housing supply, high mortgage rates, and sustained demand are fueling rental price increases in many parts of the country. While some cities will see rapid rent growth, others—particularly oversupplied Sunbelt markets—may experience stabilization or declines.
For real estate investors, now is the time to evaluate opportunities carefully. Those with access to capital may find favorable deals as struggling landlords offload properties. However, smaller landlords relying on leverage must consider the risks of high borrowing costs before entering the market.
While the days of bidding wars and easy cash flow may be over for now, strategic investors who understand the market dynamics will find ways to thrive in this evolving landscape.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Are We Entering a Landlord-Friendly Market? Understanding the Shifting Rental Landscape
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“