Florida, South Top Inflated Rental Markets

Some of the same researchers who collaborated to evaluate markets where homes are over or undervalued released a new report this week, this one focused on rentals, finding a continued trend of rental costs vastly exceeding expected increases.

The collaboration between Florida Atlantic University (FAU), the University of Alabama (UA) and Florida Gulf Coast University (FGCU) found cities in the South—and Florida in particular—have rental markets currently inflated massively above expectations. A total of 10 cities have rental averages 15% higher than where they should be, and two markets—both in Florida—saw year-over-year rent increases topping 30% in May.

“Until we can build units faster, the nation’s rental crisis will continue,” said Bennie Waller, an incoming faculty member at UA, in a statement.

With a historic spike in rental costs over the past few months, the researchers saw some reasons to be optimistic that most markets will not continue to balloon out of control, while cautioning that structural factors could persist in keeping rents unaffordable for the medium term.

“As long as the demand for renting remains high, rental rates almost certainly will stay elevated as well,” said Ken H. Johnson, economist at FAU, in a statement.

The average rental across the country is 9.85% overvalued, according to the researchers.

Researchers compared the “difference between statistically modeled prices and actual rental prices” using Zillow data to determine whether the market was over or undervalued, also calculating month-to-month increases. Largely, rent spikes have hit the South and West the hardest, they found, and even areas with traditionally lower rents are increasing at a far swifter pace than predicted.

Sierra Vista, Arizona, for instance, has an average rental cost of $1,291—well below the national average of $1,979. But that rent is 18.6% higher than it should be, the researchers found, up 17.8% year-over-year.

Factors

Unsurprisingly, a lack of inventory and high demand are a primary cause of these over-inflated rents, according to the researchers. Shelton Weeks, a researcher at FGCU, faulted local governments and grass-roots resistance from residents for stymying the creation of more rental housing.

“In addition to the lengthy approval process faced by apartment development projects, a primary culprit here is the resistance within many communities to new projects with higher levels of density,” he said in a statement. “In order for markets to function properly and add supply where needed, it is critical for municipalities to streamline the approval process for these projects and for density to be increased to a point where the new units can be offered at reasonable rental rates.”

Johnson also posited that mortgage rate increases will indirectly drive up the cost of rentals as the pool of homebuyers shrink.

“The Fed’s interest rate increase will price more people out of the housing market and keep them as renters,” he said.

At the same time, “the vast majority” of the 107 metros examined by the researchers are on pace for smaller year-to-year increases than in 2021, though exactly when, how and where renters will get relief is uncertain. One path to increasing the rental stock is through seasonal or short-term rental properties, many of which are “likely” to become traditional rentals as investors try to cash in and sell at the peak of the current housing market.

Johnson adds that some renters—particularly in the warmer climates of the South and West—may be forced to return to in-person jobs in other areas, freeing up some supply.

“These two elements could come together to produce a better balance between supply and demand of rental units and give burdened renters a break,” Johnson said. “But until then, renters may have to cut back on discretionary spending to make ends meet.”

Here are the top 10 inflated rental markets: