Rising rent prices are bad for renters but is it good for the housing market? I say it is, and here is why.
Rising rent prices and rental rates across the country
Rental rates rising across the country and prices are expected to increase 3.8% this year and 4% projected for 2013. That’s an average for the nation, which means the rise in rent prices could be much higher in cities with high rental demand.
In NYC for example, the rental vacancy rate is just above 1%. Demand is so great that renting often requires the level of paperwork usually reserved for mortgage applications! Rising rent prices have made the rental market so hot that it’s attracting serious investor capital with returns of 6-8%.
This is good, because it will drive rent prices up as more people get in the game.
How rising rent prices are good.
“How can rising rent prices be good?“, I hear you ask.
It does defy common sense up to a point. I mean, higher rent prices mean more of a financial squeeze on renters, leaving them with less disposable income. But this is a short-term view.
In the long term, this is how markets should work. Rent prices rise to point of excess as investors pile in. Higher rental prices make it more affordable to buy a home than to rent one. Especially when the amount of paperwork required to rent is on par with that required to rent.
It doesn’t take Warren Buffet to do the math at this point. When you’re paying very nearly as much for rent as you would for a mortgage, and you need to meet much of the same requirements to rent that you would to buy, it just makes more sense to get the mortgage.
This is of course assuming your lifestyle is suited to being a homeowner. It still doesn’t make sense to buy a home if you travel a lot or don’t expect to live in it more than 7 years. But if you’ve got strong roots in the community and foresee no geographical changes in your future then higher rent prices may be the nudge you need to get you moving.
This is a great time to buy a house – provided you use it as a long term shelter and aren’t looking for a quick profit.
But don’t just take my word for it, here’s a video from BankRate.com: