As more Americans get vaccinated and the country’s economic outlook improves, there’s a question on the minds of both renters and landlords: What will happen to rent prices once the pandemic ends?
Rents have been on a wild ride over the past year. The rent for a one-bedroom apartment in New York City dropped 18% and in San Francisco fell 24% last year as the pandemic and remote work spurred white-collar professionals to flee big cities. Landlords slashed prices and offered rent-free months to attract new tenants, while existing renters who were out of work struggled to keep up with payments. Meanwhile, rents in smaller cities such as Charlotte, North Carolina, and Boise, Idaho, jumped by as much as 20% as remote workers moved in.
As a professor at the USC Marshall School of Business who studies the rental and housing markets, I’ve been closely following the ups and downs of this unprecedented year. While it’s difficult to make predictions about where we’re headed, here are four trends I’m watching that could have a major impact on rent prices after the pandemic.
How many people continue to work remotely?
Proximity to jobs has long been one of the main factors driving demand for housing in major cities. But for the more than half of Americans who shifted to working from home last spring, that demand evaporated almost overnight. In New York City, for example, 487% more people left the city last year than in 2019.
Employers are now evaluating whether to embrace remote work or require workers to return to the office. Major companies such as Twitter, Hitachi, and REI have announced plans to make remote work a permanent option for some employees. According to a January PwC survey, more than 75% of office workers say they want to work from home at least once a week after the pandemic, and 83% of executives say remote work has been successful for their companies.
Research from my USC Marshall colleague Andrii Parkhomenko suggests that if remote work remains popular, people will continue to leave major urban centers in favor of smaller cities and suburbs. On the other hand, if most workers come back to the office, that will likely mean a large number of people returning to cities. Whether remote work proves to be a permanent disruption or a temporary blip will have an enormous impact on the rental market, particularly in major cities.
How will pandemic housing prices affect future rent prices?
Even as the economy tanked, home prices soared. The pandemic and record-low mortgage rates spurred many renters to become first-time homebuyers at the same time the supply of homes for sale declined. While rents plunged in Atlanta, for example, home prices jumped 25%.
This housing boom could have a lasting effect on rents. My research on the rental market in California shows that landlords often use out-of-date information about the value of their property when setting rents. Those who bought between 2005 and 2007, during the last peak in the housing market, typically charge higher rents than landlords of comparable properties purchased at the bottom of the market from 2008 to 2010. These past trends suggest that if people who purchased homes this year decide to rent out their properties in the future, they could set higher average rental prices simply because they bought at a time when home values were at a peak.
How will landlords respond to pandemic losses?
My research found that landlords also set rents based on how much they owe on their mortgages. An estimated 12% of landlords took advantage of mortgage deferral programs during the pandemic, and they may raise rents when their payments come due. Landlords who lost an estimated $7.2 billion in rental income due to pandemic eviction moratoriums and rent freezes could also end up charging more in the future to recoup these losses. On the other hand, those who refinanced their mortgages at historically low interest rates may charge less than they would have otherwise.
In addition, landlords who were hit particularly hard over the past year have been selling their properties, in some cases to first-time homebuyers who plan to live in these homes rather than rent them. Eleven percent of landlords say they’ve been forced to sell at least one property due to the pandemic’s economic fallout, potentially reducing the supply of rentals for years to come.
When will pandemic relief policies end?
The housing and rental markets have been heavily influenced by government stimulus and relief programs. Policies such as down payment assistance for first-time homebuyers encouraged people to move from renting to ownership, while the Federal Reserve pushed interest rates to near zero and announced plans to keep them there until 2023. My research has shown that announcements such as this from the Fed tend to impact the cost of mortgage credit, which in turn influences the supply and price of rentals.
Meanwhile, eviction moratoriums and rent freezes have shielded renters from being forced out or having their rents raised. But rent has been postponed, not forgiven, and when these protections end, as many as 12 million people could be evicted from their homes, and rental prices could drop suddenly as the supply of available rentals increases. The longer that these policies continue, on the other hand, the more stressed landlords may feel a need to sell their properties and remove them from the rental market. Overall, how and when pandemic relief policies wind down could have a significant impact on future rents.
The COVID-19 pandemic permanently changed the way people work, upended the housing market, caused massive losses for landlords, and forced the government to step in with unprecedented levels of economic stimulus. As a result, rental markets across the country have been in upheaval over the past year, and it remains difficult to predict where rent prices will go next. Although the worst of the pandemic may come to an end in the U.S. this year, its effects on renters and landlords are likely to last for many years to come.
Marco Giacoletti is an assistant professor of finance and business economics at the University of Southern California Marshall School of Business. His research focuses on economic trends and the factors affecting U.S. home and rental prices.