The Expert Podcast

Monthly housing cost is the biggest expense most people have, and whether you're a homeowner, a renter, or you want to buy a house, predicting the future of housing costs is probably the most important projection you can make. There's some hidden information in this article from The Wall Street Journal that points to what is going to happen with housing prices—both in home purchase prices and rental lease costs—and that's the most important thing.

Rental lease costs, in particular, are something you can't avoid. If you buy a house, you get a mortgage, and your mortgage payment stays the same for as long as you have the house. Renters, however, face the possibility of rent increases every year, determined by the market and by what the landlord decides. There are some troubling signs in the business strategies of large-scale landlords. This article touches on how these landlords—primarily hedge funds—can't find houses to buy. We're not talking about individual landlords but these big hedge funds that buy thousands of homes to rent out. Some are even buying new homes from builders to turn them into rentals. The complaint is that higher rates and limited properties for sale mean Wall Street can't find enough houses to buy. Boohoo for them, right?

However, there's something even more troubling hidden in this article. Toward the bottom, a managing director at a Wall Street research firm is quoted, saying, "You can't paint a better backdrop for pricing power for AMH and Invitation Homes." These are two large-scale leasing companies that buy houses and rent them out. The research manager explains that the economy is reasonably healthy, with people fully employed and wage growth remaining solid. While wages may not be keeping up with inflation, people are still getting raises. Meanwhile, the barriers to homeownership are staggering—a "triple whammy." People can't afford houses because mortgage rates are nearly 9% (and projected to reach 10% within a year), housing prices have risen dramatically, and the cost of financing a purchase has soared.

For landlords, this data works in their favor. Their algorithms tell them to price rents high because renting single-family homes has become cheaper than financing purchases—not because rents have gone down, but because mortgage costs have gone up. Landlords see this and recognize they can increase lease rates even further. Although rental rate increases have been aggressive, they still haven’t kept up with home price appreciation. This means landlords see room to raise rates even more for apartments and rental properties.

Where can people go if rents keep rising? Many can't buy houses because they can't get financing, don’t have the down payment or credit, or simply can’t find suitable homes to purchase. Others don’t want to lock themselves into one place because they may need to move. AMH, one of the rental companies mentioned, has averaged $2,000 a month in rents. According to the article, rents could rise more than 30% before reaching the equivalent cost of buying a home. Landlords know this and are likely to exploit the gap.

Some may argue that if rents rise 30%, people will just buy houses. However, this isn’t always feasible for everyone due to the reasons mentioned earlier—financing, credit, down payments, or personal preferences. These rental companies analyze this data well in advance of the public. It’s a self-fulfilling prophecy: higher rents push more renters to stretch to buy homes, and that demand keeps home prices from falling.

Let us know in the comments what you think about the combination of rising Federal Reserve rates, increasing rents, and whether you feel any sympathy for corporate landlords struggling to find houses to buy. I bet you don’t.