Why are Rents Rising? Many Reasons!

We recently spoke with a tenant looking for a studio or small 1-bedroom apartment about the search. Variation in the quality of apartments from exposed brick to smelly tomb was frustrating. So were the rents: high and higher. That economic anxiety coupled with the usual challenge of qualifying makes for a lot of stress in the apartment hunt. Let’s look at why those rents may be rising.

change in median income 2007-2016 map for Los Angeles CountyConsider the factors that already complicate the average family’s quest for affordable rental housing. From a macroeconomic perspective, middle- and working-class households are not doing better. Household median income adjusted for inflation is only now catching up to earnings at the onset of the economic crisis. That’s a 10-year setback in terms of earning power. (For Los Angeles County residents as a whole the median income has actually declined relative to 2007.)

California also ranks among the states with the highest level of income inequality already, according to the Census Bureau. The changing nature of work and erosion of middle-class earning power also make for headwinds when the real estate market is overheating and rents are rising across the board. Practically it means settling for less.

Second, the households seeking rental housing today are better-resourced than in the past. There is renewed interest in rental housing in urban areas, and that increases competition in the upper range of the rental market for households able to afford it. Indeed households that rent on average are showing higher incomes than they did in the past.

Reeves 2-BR apartment detail: the second bedroomLast year a residential rental housing developer told his audience at the Multifamily Annual Conference East in Washington DC that 65% of his new leases are for 2-bedroom apartments in new construction at $3,500 per month.

To put that rent in perspective, here is a postage-stamp sized second bedroom in a tiny 2-bedroom apartment on Reeves. This 80-year old walk-up unit boasted chalk-white paint but not much in the way of modern amenities aside from that old air conditioner. Yours for $3,100 per month.

Third, the new tax law adds to the advantages of renting relative to owning. One big change is the lower cap on deductible mortgage interest: it means it will cost more to own a home with a mortgage, and it greatly affects households in expensive areas like Southern California. That is compounded by the new limited deduction for state and local taxes, which also makes home-owning relatively less attractive. The rental apartment industry anticipates more households will rent. And that means higher prices for you and for me.

Fourth, in an already-tight rental market, advantaged renters will push up rents when they look down-market for affordable digs in a hot market. As the Times explains: “One result of the surge in higher-income renters is that units that policymakers politely refer to as ‘naturally occurring affordable housing’ — run-down buildings where lower-income residents can afford an apartment without subsidy — are being pulled toward the higher end of the market.”

Fifth, families forced out of their homes during the economic crisis have entered the rental market. Also new to the rental market are non-traditional households: younger, often single residents that may have endured housing arrangements of convenience but now are moving out of basements and roommate situations concurrent with the slow recovery from the economic crisis. It is a bitter and ironic twist that as this pent-up demand for rental housing is released, the rent is rising and putting housing even farther from reach.

These factors won’t explain how a prospective tenant in Beverly Hills can understand our rental market. We have a preponderance of older properties with smaller units in various states of repair. Mom-and-pop owners don’t always bring that stock up to today’s expectations. We also have owners with one to three properties under control who rent directly without a broker. So there is wide variety in pricing too. As she said, “It’s all over the map!” One thing is clear though: asking rents may to some degree reflect what’s on offer, but the rising tide of rents overall make the available units less and less of a value proposition.