Economists Recommend Caution When Raising Rent

Rental rates have steadily risen for several years. And thanks to low rental vacancies on a national level, they are likely to continue doing so. However, some economists warn that raising rates too much—even if the market will accommodate such a move—could create a cost-burdened renting population.

The balancing act required is a delicate one. It involves housing affordability and the very real issue of creating a positive bottom line for investment portfolios.

Why Rents are Rising

Two of the country’s largest single-family landlords—Invitation Homes and Tricon American Homes—believe occupancy rates in rental properties remain high, exceeding 95 percent. This has been the case for the past three years.

Senior Vice President of Communications at ATTOM Data Solutions, Daren Blomquist, notes numbers seem to remain steady. “Rent growth rates continue to be solid in most of the major markets across the country—in the middle to upper single digits.”

Such information indicates landlords have room to raise rents and keep vacancy rates at a low level.

Housing Inventory and Housing Affordability Affect Rentals, Too

Although this seems like positive news for landlords, the Harvard Joint Center for Housing Studies (HJCHS), warns the move could create a large cost-burdened renting population.

Cost-burdened is, by definition, a household spending more than 30 percent of its income on rent. Some organizations have formally called on institutional landlords to cash out their single-family rental portfolios. Doing so would create a larger housing inventory for current renters to purchase. So far, institutional investors have passed on the idea.

As long as operators retain their portfolios, the inventory of starter homes that renting households would purchase will remain tight. Furthermore, a common belief is that institutional investors have a commitment to investors to raise rents when appropriate. This leaves a gap in the system that may be filled by investors who can serve cost-burdened households by providing purchasing opportunities.

Blomquist believes “Operators should be buying properties that cash-flow well,” rather than raising rent down the road.