Inflation and Interest Rates on the Rise: Why US Rental Market is a Lucrative Opportunity for Investors

In times of inflation and rising interest rates many prefer lowering exposure to?

investments and adapting to a lower key economic environment. Despite this, these situations often present opportunistic investments and lead different markets to thrive during this period, this is where investors should enter and take advantage.

The US residential rental market is one of these opportunistic segments at times like this. Regardless that it is known to be a rather stable market, it portrays a great opportunity during inflation and rising interest rates.

Why is that?

When inflation hits leading to a hike in interest rates, mortgage payments become more expensive. According to John Burns, during 2022 the hike in interest rates boxed out about 20M households from being qualified for a mortgage. This can lead to an increase in demand for rental properties, as people delay or even give up on their home purchases and continue to rent. As demand for rental properties increases and while supply remains low due to the decrease in new construction caused by high interest rates, landlords may be able to raise rents and still maintain a low vacancy rate.

This can be proven by the following graph published by CoStar, showing rent prices are expected to continue increasing.

Many may say market conditions and high rents will lower demands, people won’t be able to afford the increase in rent prices, but this doesn’t seem to be true, since the rent income ratio is kept at about 28%, allowing people to absorb the rent price increase. Also, housing is probably not the first thing one may give up but probably the last, this strengthens the demand even more, and allows rent prices to keep increasing at such times.

For investors the interest rate hikes create an additional opportunity which is purchasing distressed assets, since many leveraged players have difficulty paying off loans due to high interest rates, forcing them to sell their assets.

The following graph published by Marcus & Millichap shows that the hike in interest rates increased mortgage prices in a higher rate than rent prices, forcing people to stay in the rental market.

The US Sunbelt is known for its high demand in rental housing, this is due to the growth population in the area.?

According to the US Census Bureau, the average US population growth between 2010-2022 is about 7.4% in the US and 20% in the Sunbelt, there are a few reasons for that: great weather conditions, economic growth which has led to an increase in job opportunities and low taxation.

These reasons all help increase demands in the Sunbelt which drives rent prices up. Another reason for high demands is the gap created between supply and demand, According to the US Census Bureau 2022 data, In the last decade there was a shortage of about 7.8 million apartments and a decrease in the volume of new constructions, in the past six months there is an additional decrease of 38% in new construction, due to the increase in interest rates, leading to an enlargement in the gap.

To conclude, The US rental market remains fundamentally strong and even strengthens through these challenging times. In addition, investments in portfolios provide risk?diversification , due to scattered states and cities and multiple tenants.?

It’s important to note that no market or asset is risk free, but the residential rental market is relatively stable and can provide great returns for investors.?

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