Rental returns diminish due to skyrocketing home prices

Market Trend

Rental returns diminish due to skyrocketing home prices

According to a new report: Returns on single-family rentals are dropping across the United States as home price growth outpaces rent growth.

The report, from real estate data curator Attom Data Solutions, found that profits on three-bedroom rentals decreased between 2021 and 2022 in 72 percent of the 212 counties analyzed for the report. While most declines were less than one percentage point over the past year, the report found that three-quarters of counties where median home prices exceeded $250,000 saw declines in rental yields.

It also found returns decreasing in counties where median home prices are below $250,000, but returns remain above 8 percent on average in those counties despite the declines.

The declines in returns come as home prices shoot up along with rents, increasing the amount landlords must pay for rental properties. Median prices for three-bedroom houses increased at least 15 percent between 2021 and 2022 in half of the counties analyzed for the report, while only one-third of markets saw rents increase that much, according to the report.

“Investors who own single-family rental properties have seen their margins compressed over the last year as home prices have risen faster than rental rates,” Rick Sharga, executive vice president of market intelligence at Attom, said in a statement. “The good news for these property owners is that their yields should improve as annual rental rates increase, and they should also benefit from home price appreciation over time.”

The largest returns on single-family rentals were seen in lower-priced counties, which also recorded fewer declines in profits. Six of every 10 counties with median home prices below $250,000 saw profits exceed 8 percent. The affordable counties with the highest yields on average were Atlantic County, New Jersey, where yields were at 12.2 percent, Wayne County, Michigan (10.7 percent), and Jefferson County, Texas, (10.1 percent).

The smallest returns were found in counties where median home prices were at least $500,000, including Santa Clara County, California, where returns where at 3.1 percent, San Mateo County, California (3.2 percent), Williamson County, Tennessee, (3.9 percent), and Kings County (Brooklyn), New York, (4 percent).

Big expensive cities were also among the only counties where wages were found to be rising faster than rents, while three-quarters of all counties analyzed saw rents outpacing wage growth. Twenty-seven percent of counties saw wages growing faster, including in Cook County (Chicago); Orange County, California; Kings County, New York; and Miami-Dade County, Florida.

Large cities like New York and Miami have seen rents increase to historic highs as the cities have emerged from the pandemic, but Sharga suggested their markets may still be in a recovery phase.

“The fact that wages are rising faster than rental rates in some of the country’s largest metropolitan areas could be due to COVID-19,” Sharga said. “The flow of urban renters to the suburbs, where they became homeowners, was accelerated by the pandemic, causing relatively high vacancy rates in places like New York, Chicago and Los Angeles, and many of these markets are still recovering.”

May 21, 2021 Real Estate