Rental Property Leasing: The Tenant Pool Has Never Been Deeper

IS THE LARGE AMOUNT OF HIGHLY QUALIFIED TENANT CANDIDATES A GOOD THING?

It goes without saying that there is always a pool of prospective renters and current renters out there but that group has never been larger, or more highly qualified, than they are today. At first glance this sounds like a great thing but in reality it is just another downstream effect of the wonky real estate market and it’s hurting more stakeholders than it’s helping. Let’s take a deep dive to look more closely at how we got here, who this benefits and who this harms, and what solutions, if any, might exist.

LEARN MORE: BETTER UNDERSTAND THE SEASONAL TRENDS OF THE RENTAL MARKET

THE CURRENT REAL ESTATE MARKET 101

It’s no secret to anyone this deep into the market’s stagnation that we’re in an odd spot and it’s a terrible time to buy, which also makes it a tough time to sell. Purchasing power just isn’t what it needs to be to get the market out of its funk. The pandemic and subsequent shutdown triggered supply chain issues, increases in costs of building materials, and a decrease in construction output. At the same time, people were in their houses more and yearned for change. Government financial assistance helped them feel they could get it. Add on to that the resulting inflation (with more money in the system and less goods/services available for that money to be spent on) and you’ve got a recipe for major disruption. Conclusion: Too much demand and too little supply drives prices up dramatically and this friction slows the market.

When we zoom in and look specifically at the housing rental market, the story is the same. The Fed raised interest rates to try to tamp down that inflation and a major side effect was the further freezing of the housing market. With mortgage interest rates as high as 8%, anyone who owns a house and has a rate below 4% (with many closer to 2%) is holding on to their assets and staying out of the market. This means miniscule supply, which means more demand, and again, higher prices for those properties out there. As we concluded previously, too much demand and too little supply drives prices up dramatically and adds friction to the market. Let’s look closer at that friction and how it relates to the current tenant pool.

THE MOST HIGHLY QUALIFIED TENANT POOL IN HISTORY

Housing prices are sky high (see “demand” issues above) and so are interest rates. That means it costs more to buy a house than most people can afford, or want to afford. A house that was likely under $500,000 a year or two ago is going to be listed at $650,000 today (or worse). At 8% interest rates, a buyer would be looking at a mortgage of $4000/month!!! Typical guidance is that housing should cost about 30% of your gross income. That means the buyer of this home should be making roughly $160,000/year to live here comfortably without mortgaging their future. So what if you make $100,000/year? You could have a six figure salary today and it is not enough to buy the home you likely want (without forcing the issue of course, which you should not do). You either find a cheaper place to buy and get low value for your money at these interest rates, or you wait it out. And waiting it out more than likely means…renting.

Rental tenant candidates make more money than they ever have before. Their purchasing power is high, but they can’t compete with the two-headed monster of current prices and interest rates. In 1981, the median age of all home buyers was 31. In 2023 it’s up to 49. Young, motivated, hard working people with money who would’ve bought a home as recently as a decade ago, are now competing for rentals. The tenant market is very healthy…perhaps too healthy.

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TENANTS ARE “STAYING RENTERS LONGER”

As Nexus’ VP of Franchise Sales, Greg Rice, puts it, “this is pushing people a step backwards”. Former buyers may become renters again and they’re competing with the aforementioned group that would’ve been homeowners in years past. This (again) means more demand, and drives rental prices up. Ultimately, with higher rents, people may find a nice place to live but they can’t afford to save for a future downpayment, which means they’re stuck renting for longer. Not only are they at a disadvantage here and now, but their ability to get out (i.e own a home in the future) is also under threat.

Naturally, this all trickles down and lower-income earners have a harder time finding a quality place to rent and call home. Unless you’re at the very top or already secure in your housing situation, your prospects are far dimmer than they should be and the log jam is pushing everyone back down the hill as the climb up gets steeper.

LEARN MORE: MORE AND MORE AMERICANS WHO COULD AFFORD A MORTGAGE ARE STUCK IN THE RENTING CYCLE

WHO’S WINNING?

It’s a fair question. Let’s look at all the players in the real estate wheel, starting at the bottom:

RENTERS: Not winning: forced to pay higher prices and competing against each other; more difficult to save to buy a home.

LANDLORDS WHO RECENTLY BOUGHT AN INVESTMENT PROPERTY: Not winning: they’re charging higher rents but they have higher mortgages due to elevated interest rates. More income is being sucked dry by higher expenses.

LANDLORDS WHO OWNED BEFORE THE RATE HIKES: Likely winning: They can increase rents to keep up with the market without increases in their own spending ←they just need to make sure they’re keeping up with maintenance obligations.

LENDERS: Not winning (as much as usual): Less supply also means less action for banks. The amount of houses sold in the U.S. has dropped by 1 million the last two years in a row. At the same time, no one is looking to refinance so interest rates are hitting lenders hard too.

What can we can conclude? The current state is a lose-lose for most stakeholders and it’s most impactful the lower people are on the list. Landlords who owned rental property prior to this market turn can take advantage of the lower interest rates they’re locked in at and could really capitalize as they have less competition once properties become more affordable to purchase. But even in that scenario, nothing changes until property values drop.

LEARN MORE: FORBES’ HOUSING MARKET PREDICTIONS FOR 2024

WHAT’S THE SOLUTION?

Take a nap? Hit the snooze button? Build a time machine?...Speaking of building, construction has increased in recent years but has grown least in the areas with the highest demand (i.e. cities and areas in the Northeast). In time, greater supply will help dampen the high demand. Additionally, the Fed has announced plans to hold rates at current levels and indicated there will be three cuts to interest rates in 2024. Hopefully this takes some pressure off the valve and those potential buyers who opted to stand against the middle school gym wall will find the courage to get out on the floor once the disco ball starts to spin. There don’t need to be enough potential partners for everyone (obviously construction will lag); just enough beats to pull people closer to action will get the market moving.

Those people forced to rent in this market who would otherwise be able to purchase need to do their best to save while they weather the storm. Zero risk, high interest savings accounts are easy ways to store money so you can build toward that eventual downpayment.

No matter who you are, you can always benefit from building a relationship with a reputable property manager in your area. As of this writing, Nexus Property Management® has franchise offices in four U.S. states and offers franchise opportunities from coast-to-coast. Unlike traditional realtors, property managers are active in all aspects of the rental market and will be most familiar with up to the week/month trends in rental pricing and maintenance service expenses. Many property managers also offer investment advice and services for their clients, so they’ll be tapped into the future of the market as well. If you’re interested in learning more about Nexus’ services contact any of our teams across Arizona, Connecticut, Massachusetts, and Rhode Island.

LEARN MORE: NEXUS PROPERTY MANAGEMENT’S NVEST® BUYERS’ AGENCY PROGRAM

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Mick Lefort is the General Manager of Nexus' New Haven County Franchise Office and the Vice President of Operations for Nexus Property Management®, a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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