The real estate feeding frenzy that’s occurred over the last 18 months, or so, is clearly over. Interest rates were down and people were up-sizing their homes largely due to being pent up in them due to COVID. Prices soared to unprecedented levels and market times were insanely low, oftentimes creating bidding wars. Some of this craziness reached over into the rental part of our industry and some parts of the country saw unprecedented rent increases.
What caused the rent increases? Some of it was the same demand for housing that caused the surge in prices for the sales side. Simply put, a lot of people were moving. The pricing surge also caused property taxes to soar for many. Where those two weren’t enough, inflation caused increases in salaries for many rental units, primarily in the apartment industry.
Over the last 3-4 months we’ve seen a tremendous change in the San Antonio rental market. Rents are coming down and rentals are also staying on the market longer. There are a lot of reasons for this. The most important one is that the market is correcting itself—many real estate economists and industry experts are agreeing on this. Overinflated prices are a thing of the past. Landlords thinking they can continue getting the previously inflated rents are in for a wake up call.
A story in a recent Wall Street Journal article told of a couple who chose to move out of their apartment, facing a $900 rent increase. The unit sat on the market for four months as of the publication of the article, with multiple price reductions. This is a problem we hope to avoid with sensible increases where warranted. Several of our listings long on the market at the time of this writing are simply due to landlords insisting higher rent than the market will support, clearly counter to our advice.
Another reason the market is changing is that there’s too much inventory—far more supply for the current demand. There are simply fewer people moving right now. This is temporary. Businesses continue to expand in the area, bringing more employment and more people. San Antonio continues to be one of the more affordable cities in Texas, this too will bring more people to our area. People haven’t been moving if they didn’t have to, it was too expensive to move. Regardless of whether people wanted to make a lateral move into a similar place, or upgrade to a larger one, the costs have made moving prohibitive for many.
Why is demand low? Increased mortgage rates combined with higher home prices have certainly placed the idea of purchasing a home outside the reach for many. But, these folks will continue to rent. There are others who are still holding out, trying to decide what to do or if they can buy. They are waiting to see what happens to the mortgage rates and home prices. If they can’t buy, they’ll continue to rent. There’s another factor that many haven’t considered: substantially more people bought homes in the last couple years than normal. These situations are all contributing to the low demand and also causing it to take longer for homes to rent. You could take my word for it, or take a look at these numbers.
So, what does this mean going forward? For those wanting to sell, they won’t be getting the insanely high amounts that had been happening. But, the market before COVID was still pretty good. There were a lot of sellers making money in 2018 & 2019. Just like it was in those years, there are also going to be some good deals for investors too.
Buyers are going to have a bit harder of a time, though. Higher interest rates will decrease their purchasing power. Even though investors typically pay a higher rate to finance real estate purchases than an owner-occupied purchase, this is still a great market for investment purchases. I expect investors to capitalize on the opportunities presented by some homes sitting on the market for longer periods of time.
The demand for rentals in our area will continue to be strong overall. The rental market will pick back up and rent rates should stabilize next year. There are just too many good things happening in the San Antonio area for the rental market to remain as sluggish as it’s been these last few months.