Rent prices are the talk of the town lately, and with good reason. After all, they have been steadily outpacing wage increases for the better part of four decades. But recently they have been increasing at an even more alarming rate. Rent prices have never been higher, and they just keep going up. But why now, and what can we do to help our finances keep up?
Today we are talking about why rents are increasing and what steps you can take to create more room in your monthly budget.
Why is rent increasing?
Rents have steadily been increasing and outpacing wages for decades. In fact, the average rent has increased 149% since 1985 while income grew by just 35%. That means rent has been increasing at a rate that is nearly five times faster than income. The rule of thumb when it came to budgeting used to be simple: pay 30% or less of your income on housing costs. But this rule is nearly impossible for people who make under $30,000 a year to follow. After all, that would mean finding an apartment with rent and utilities for under $750 a month (compare that to the national average for a one bedroom apartment which is $1169). Even with roommates that is a difficult undertaking with the soaring costs of rents.
From March 2021 to March 2022 the average rent rose 17%, while wages only increased by 6%. This disparity has a compounding effect, creating more and more of an issue for renters every year. It is only becoming harder and harder for people to pay their bills every month.
Let’s look at a few of the reasons rent has been soaring lately.
The pandemic created more competition in the rental markets.
The pandemic had everyone stuck in their homes–and therefore stuck with their housemates. This caused many people to want their own space. Young adults wanted to move out of their parents’ homes, people with roommates wanted an apartment of their own, and many couples broke up and needed their own space.
According to US census data, the amount of US households grew by 1.48 million last year. That is a huge increase in the amount of homes and rentals needed in the United States. All of these extra households created more competition in the rental market, leading to higher rent prices across the country.
We have been underdeveloping housing for over a decade.
A decade of lax development has finally started to show its face. After the 2008 crash, many homebuilding companies slowed their development plans. This resulted in nearly fifteen years of housing development being outpaced by the growing population. Housing units that were built were aimed at the wealthy–luxury condos and high rises were being built in lieu of affordable housing options. This was only exacerbated by the pandemic, where a shortage of workers and materials caused a further drop in new construction. While the demand for housing has been rising, the supply has been unable to keep up.
An increase in mortgage rates made buying more expensive.
Mortgage payments have increased an average of 6% since the pandemic, which equates to hundreds of extra dollars a month. On top of that, the housing market is becoming increasingly more expensive. The median sale price of an American home recently hit a record high of $346,900 according to the National Association of Realtors. The price of single family homes increased 18% in 2021 alone.
This means that many Americans are simply being priced out of buying a home, and renting is their only option. Would-be homeowners are adding to an already crowded rental pool, causing more demand and higher rent prices.
Rent freezes have expired.
Many cities and states put rent freezes in effect early on in the pandemic. Now that those freezes have expired, many landlords are adding in two years worth of rent increases at once–essentially trying to make up for what they feel they lost. But this is a huge hit to renters who are having their rents raised by hundreds and hundreds of dollars.
New renters with deep pockets.
New renters entering the market with a lot of disposable income are also driving up the rental markets. The pandemic brought on a wave of new work from home opportunities, allowing people with very well paying jobs to work from anywhere. Instead of being confined to the big cities, white collar workers with high paying jobs could suddenly relocate anywhere, affording larger and more luxury apartments outside of New York or San Francisco. This brought more competition to smaller cities and towns.
This wealthier demographic is changing the rental game in a lot of ways, adding more fuel to the fire.
How long will rent increases last?
With so many factors affecting the rental market, it is hard to predict exactly how long rent prices will keep climbing. It will depend a lot on if supply and demand can level themselves out. If new construction can create more affordable units, that will help a great deal.
Similarly, if potential homebuyers can actually buy homes instead of being outpriced, that will help the rental market as well. Unfortunately that seems unlikely as economists predict that home prices will continue to rise into 2023.
Either way, many economists predict that the rental market will revert to its typical 3.5% growth after 2022.
How can you save extra money every month to pay rent?
While we cannot control rent hikes or cost of living increases, we can control our budget. Cutting our expenses here and there is one way we can help to offset the increasing rent prices and help make ends meet.
Focus on your credit score
Increasing your credit score is always a good idea, especially when financial times are difficult. Having a good credit score is important for a lot of reasons. A good credit score can help you:
Get you approved for a mortgage
Get higher credit card limits
Get approved for a car loan
But in addition to opening you up to more lines of credit, a good credit score can actually save you money.
It can get you lower car insurance payments
It can help you get a better car loan rate
It can help you get a better mortgage rate
It can help you get better credit card rates
All of this can add up to hundreds if not thousands of dollars of savings every year. There are some simple steps you can take to increase your credit score. Making full, consistent, and on time payments is one of the best ways you can help your credit score. Focusing on paying down any debts and increasing your lines of credit can also help give your credit score a boost.
Refinance your car loan
Refinancing your car loan can give you a little (or a lot) of extra breathing room in your budget every month. It can cut your monthly loan payments in a few ways.
Refinancing to a lower car loan APR will automatically reduce your monthly payments. But refinancing and selecting a longer repayment period will allow you to repay your loan over an extended period of time. That can reduce your monthly payments drastically.
Let’s say you have $20,000 left in your car loan. Even if your interest rate remained the same at five percent, refinancing from 36 months to 60 months will reduce your monthly payments by over $170. And that can really help make up the gap with rent increases.
Stick to a budget
A budget is your best tool for keeping pace with rent increases. It is so important to keep track of your incoming and outgoing money, as it will tell you exactly what your financial state is.
Making a budget doesn’t have to be complicated. Simply track your income, track your expenses (take an average of any expenses that vary) and see how they line up from month to month. If there are any categories that seem too high, like subscription services or grocery bills, see where you can make some cuts. Try canceling any services you don’t use a lot, start buying generic brands, and sign up for any rewards programs that can give you extra savings.
That’s why rent prices are increasing and what you can do to create some extra room in your budget.
It’s hard to say when the rent increases will slow down, so it’s important to be smart with your money today so you don’t have trouble in the future. Creating a solid budget, working to increase your credit score, and refinancing your car loan are all great steps you can take to help handle the rental increases.
If you have a car loan, there’s a good chance you are overpaying every month. To find out how much money you could be saving, get in touch with Auto Approve today. Our refinance experts can help guide you through the process and start saving you money immediately.
Don’t wait–get in touch today!