Following a year of rapid economic recovery and talks of a possible recession, questions about the 2023 rental market come to mind. Will rents continue to rise? Will vacancy rates remain low? Will mortgage rates stabilize? What factors will drive demand for rental properties in the coming years? In this blog, we'll take a closer look at the projected rental market analysis for 2023, exploring the trends and factors that are likely to shape the rental landscape in the years to come.
Looking back on the volatile housing market
Following a year that could only be described as a frenzied time for buying and selling, the housing market in 2022 saw extreme highs and lows. The year kicked off an increase in home prices and overall growth before steadily downshifting through the remainder of the year. Thanks in large part to historically low mortgage rates and high demand, the average sales price of a new home reached $543,600 and peaked midway through 2022. By the end of the year, the combination of limited supply, high demand, and rising inflation rates led to a steep decrease in home sales, dropping by 23% by November.
In spite of the cooling market, home prices remained high throughout 2022 due to the ongoing housing shortage. Pandemic factors like costly materials, labor shortages, and supply chain issues have contributed to this shortage, but fears of another recession have also deterred homeowners from selling. Another factor negatively impacting housing supply? Real estate investors, who made up more than 13% of all residential sales in 2021 with the intent of turning those homes into a profit.
According to Bankrate, it’s likely the housing shortage will last for some time and buyers should expect the market to continue favoring sellers. While we’re already seeing some hints that the supply-and-demand equation is balancing out, it remains to be seen how factors like rising inflation and mortgage rates impact the market long-term.
How will industry shifts in 2022 impact the 2023 rental market?
Movement in the housing market will naturally produce a sort of trickle-down effect in the rental market. As hopeful homebuyers were priced out of their chosen markets, demand grew for larger rental properties, including single-family homes with large outdoor spaces that could accommodate multiple home offices and homeschool spaces. Indeed, large institutional investors have begun aggressively investing in residential real estate, predicting top-tier returns in the months and years ahead.
In order to maintain some stability during the pandemic, local and state governments instituted a variety of eviction and rent increase moratoriums to protect renters from rising demand and the effects of restricted rental inventory. While widely praised by affordable housing advocates, these measures were derided by small-scale rental property owners who found themselves spending months without rental payments. Many of these moratoriums expired in 2022. However, the decision whether or not to extend tenant protections fell to the state. In California, for example, the LA County Board of Supervisors voted to extend the moratorium for residents through March 31, 2023.
2022 also saw rent prices increase dramatically as a result of inventory shortages before cooling off in the back half of the year. With median home prices continuing to rise, many would-be buyers were priced out of ownership and turned to renting. While rent prices did increase 5.5% nationally in the first six months of 2022, data also shows median rent growth dipped to its lowest in 18 months. As home ownership moves further out of reach for many Americans, it’s likely the rental market to pick back up in the new year.
The effects of a cooling housing market on rent prices
We’ve seen above average home prices, sales skyrocket before rapidly cooling off, mortgage rates doubling last spring, and inflation across the board. In general, whenever there’s a housing shortage coupled with high home prices, it’s natural to see renters opt to continue renting and further limit rental supply. Based on the events of 2022, it’s likely we’ll see rent prices increase with one source predicting a rent growth rate of 5% to 7% from June 2022 to May 2023.
At the same time, there are signs suggesting that the market is headed for stabilization which could put an end to the steep increase in rent prices. Multifamily construction is on the rise nationally, which could flatten rents for apartments and townhomes in some markets. We’re already seeing an uptick in vacancies in apartment buildings, and with many new units headed to market this year, it’s not a stretch to assume prices will slightly decline as supply increases.
Of course, rent prices will largely depend on what happens in the for-sale market and whether or not we’re headed for an economic recession. If mortgage rates drop and home prices flatten, it’s reasonable to expect some renters to jump back into a home-buying frenzy. As home costs reach record highs, mortgages rise and affordability becomes a problem for prospective homebuyers, the appetite for rentals might increase as prospective consumers favor renting.
And while we’re not officially in a recession, it’s hard to deny the economic uncertainty we’ve experienced the last year or so. But even during economic slowdowns, it’s not a guarantee that rent prices will decrease. In fact, a recent Forbes article showed rents actually increased during the worst years of the 2008 Recession. At the end of the day, the pandemic kicked off a number of trickle-down factors that continue to impact the housing market today and will shape how prices for home sales and rentals for years to come.
Positioning your rental properties for 2023
Comparing the properties in the portfolio that you own or manage to available properties in your market helps you to determine both current and future demand. In addition, it is important to keep an eye on economic and demographic trends to gauge the potential for rent increases, decreases, or rental rate stability.
There are a variety of ways to use the information gathered during the previous year to plan your acquisition, management, and disposition of rental properties in the months and years ahead. Here are some factors to consider:
- Break down your rental properties by size and amenities to determine where there are shortages in your current market that you can fill.
- Analyze your current rental rates to determine whether they are still in line with your market. In many cases, you may find that rental rates in your area have seen significant increases in the past few months. A rent estimate tool can help you maximize your rental profit with a rent rate calculation based on your rental comps.
- Focus on improvements that speak to current renter demands and market your properties with these in mind. Bonus spaces and enclosed terraces offer a great option for home offices. Outdoor spaces are especially in demand for socially distant activities and entertainment.
- Evaluate your local market for recent changes that may be long-term and adjust your strategy as needed.
- Use a tenant screening tool to quickly and safely vet applicants to find the best tenants for your property.
- Explore infrastructure and continuing COVID-related government programs that may provide funding for increasing the availability of affordable housing or the creation of Section 8 housing.
- Work with your attorney to ensure that you are on the right side of changing policies and processes for eviction, rent increases, and other matters.
As you crunch the numbers and make the important decisions that are the result of your rental market analysis, it is vital for you to have a clear understanding based on reliable information. That’s where RentSpree’s rent estimate comes in. Price your property with confidence based on relevant comparable listings and reports on vacancies and trends in your area.