Price-strapped homebuyers sidelined by bidding wars, surging mortgage rates, and mounting inflation are facing yet another housing hurdle: sky-high rent.
According to real estate brokerage Redfin, the median monthly rent in the U.S. surpassed $2,000 for the first time in May, rising 15.2% from a year earlier to a record high of $2,002.
Although renting has become more expensive, for many it's the only option as rising mortgage rates have reduced the buying power of entry-home shoppers and slashed confidence levels.
“A lot of the people that are not able to purchase have now found themselves bidding for rental homes,” Peter Beckford, a premier realtor for RE/MAX based in Atlanta, told Yahoo Finance Live (video above). “We’ve gotten quite an influx of applicants and it’s getting pretty hectic.”
It's not surprising that some homebuyers have decided to put off their plans for purchase and turn to renting. As home prices register double-digit growth, rising rates have pushed the monthly mortgage payment up 64% more than last year, according to Realtor.com. That alone has added over $800 to the cost of financing a home.
Those most affected by the surge in rates and costs of living are young adults, who comprise the majority of the first-time homebuyer pool. Working class Americans also face significant hurdles, according to Beckford.
“The average blue-collar everyday worker is the one who is experiencing this situation the toughest,” he said. “As they are being priced out of the purchase market, they have a need for housing — good housing — whether it be closer to schools or job transfers.”
Tenants face stiff competition
Potential renters are no longer facing plunging rental prices that became more normal during the pandemic, particularly in real estate hot spots like New York.
With affordable properties in short supply, the influx of applicants has caused landlords to raise their prices.
“I’ve had rentals myself up to $3,500 per month that have seen 50 to 75 applicants within the first 12 hours,” said Beckford.
The sheer number of applicants has not only driven prices up, it has also raised the standard for tenants hoping to get their foot in the door.
“The large applicant pool and the overqualification of that pool has led owners and landlords to be a lot more selective,” Beckford said. “Those who may be marginally qualified for a certain rental at a certain price point or area may be pushed out in favor of someone more qualified than them.”
As a result of the highly competitive environment, some hopeful renters in major metro areas like Atlanta, where the median asking rent price has increased 18.3% year-over-year to $2,143, have had no other choice than to check in to extended-stay hotels.
The bidding wars over affordable rental units is also being exacerbated by out-of-state applicants as remote workers swap big coastal cities for the popular sunshine states.
According to TransUnion, out-of-state applications for rental properties across the U.S. increased 42% from 2020 to 2021. During that period, Texas welcomed more than 310,000 new residents — registering one of the largest population increases for a state.
An increase in Texas rental prices soon followed. Redfin data showed the median asking rent in Austin, Texas, in May surged by 48% year over year, the largest increase on record since the brokerage began tracking rental data in 2019.
Homebuyer confidence falters
Competition in the rental market will likely remain high for the foreseeable future as the sharp increase in borrowing costs weighs on homebuyer sentiment.
According to Fannie Mae’s Home Purchase Sentiment Index, consumer confidence remained low for the month of May, drawing closer to its 10-year and pandemic low of 63 points from April 2020.
And approximately 79% of respondents said in May that it’s a bad time to buy a home, up from 76% the month prior. Another 70% of those surveyed expected mortgage rates to continue to increase over the next year, further chipping away at affordability levels.
However, there is a silver lining. As rates have surged in the housing market, some homeowners have reduced their listing prices to attract price-sensitive buyers, according to Beckford. In the short term, that could lead to less competition among renters.
“As the market continues to hopefully balance, folks are making decisions between whether or not they want to continue their pursuits of purchasing versus tapping out of that market and going into the rental market,” Beckford said.
Still, renting is a feat easier said than done.
“Instead of having to bid against 20+ people, they may be bidding against five or less folks now,” Beckford said. “I do see some softening of the [rental] market. It brings some level of optimism for those who are in the market.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.