Massive rent increases to continue

The average annual increase of 3.9% is outpacing inflation and income growth. Will renters be priced out of many cities?

It's no secret renters have been feeling the crunch of a competitive rental market for a few years now. If it seems like rent increases have been unusually high this year, though, that's because they have been.

In June, the real-estate data firm Trulia analyzed the rent prices in 25 of the largest rental markets in the United States. What Trulia found is an average annual increase of 3.9%. This is a huge increase when compared with inflation. And, generally speaking, incomes are not keeping pace with rent increases, putting renters in an even tighter position.

According to Trulia, the five least-affordable rental markets in the country are New York City, Miami, Los Angeles, San Francisco and Boston. In these cities, rents often make up half or more of a renter's average monthly wage.

The cities that experienced the highest rent hikes for 2012-13 were Houston, Miami, Boston, Tampa-St. Petersburg, Fla., and San Diego. Some cities, such as Houston, already had lower rents than the national average for major cities, whereas in others the increases came on top of already higher-than-average rates. For instance, Boston — already one of the most expensive cities in the country — saw a 5.5% increase in rents this year.

It would seem the recent rent increases are an enduring ripple effect of the foreclosure epidemic that catalyzed the Great Recession, flooding the market with prospective renters. At the same time, the gradual economic recovery has resulted in rising employment rates. With a shortage of available rentals, landlords are in the enviable position of being able to name their price and have their pick among tenants willing to pay it.

In their most recent survey, the apartment-research firm RealFacts found not only that rents are up nationwide in 39 of the 41 markets analyzed but that these increases also occurred even in cities that are building rental units at a precipitous pace.

In particular, Seattle experienced a large rent increase this past year despite a projection that 12,000 rental units will be added to the market by the end of the year. Portland, which also experienced an impressive increase in average annual rents, did so even as 4,000 units were added in the city. In fact, Portland saw its occupancy rate jump a full percent this past year. San Francisco, which has also added thousands of units recently, saw an occupancy rate increase of 1.2%.

"So far, it appears aggressive rent hikes and new construction hasn't had a negative impact on occupancy rates," according to the RealFacts report.

Though there seem to be no signs of rent increases slowing down, the report warned that the market will soon become oversupplied: The increased availability of new rentals, coupled with the rise in interest rates, will eventually lead to a downturn in the rental market.

Additionally, more people will turn to buying as an affordable alternative. That's because even though home prices rose 7% in the past year, outpacing rent increases, the gap between buying and renting is still quite large.

Forbes reported this year that buying is much more affordable than renting in all of the 100 largest metro areas in the nation. According to mortgage lender Freddie Mac, buying is an average of 41% cheaper than renting nationwide.

But buying is only slightly cheaper in some cities and drastically cheaper in others. For example, buying is 19% cheaper than renting in San Francisco but 70% cheaper in Detroit. In New York, buying has remained 26% cheaper for the past couple of years.

Despite the regional fluctuations in price, though, it looks as though buying will be the cheaper option for some time to come no matter where you live. That is because 30-year fixed rates on home purchases would need to reach 10.5% to become the more expensive option. The rate is at 4.4%, as of the week of Aug. 14.

RealFacts predicts that in 2014 or 2015, rent rates will begin to stall as the rate of homeowners rise and renters decline.

Until then, renters will have to grit their teeth and wait it out — or start shopping around for their own home.