According to a recent report, the U.S. apartment vacancy rate dropped to its lowest level since 2001 in the fourth quarter of last year. Generally, when vacancy rates are low, rents will rise at an above average rate.
However, this has not been the case recently, with rent growth of just 0.8% annualized, mostly due to the low wage growth and "so-so" job market over the past few years, but this may change. If unemployment continues to drop, and wages begin to go up, it's possible that apartment rents could rise at a rapid pace, especially if the vacancy rate remains so low.
Unemployment forecast for 2014
As time goes on, it seems like the economy is improving at an even better rate than most experts had predicted. In fact, officials at the Federal Reserve recently revised their unemployment projection downward. They now say that the U.S. unemployment rate could fall to as low as 6.3% this year, down from their previous projection of 6.4%-6.8%. Sounds like a small difference, right? Wrong!
As of the most recent data available, there are over 116 million employed, full-time workers in the U.S. The current unemployment rate of 7% implies that there are a total of about 124 million people either employed or seeking full-time work. Therefore, a mere 0.1% improvement in the unemployment rate means another 124,000 people will have jobs, a very significant number.
Why wages will rise
Like it or not, the trend is pretty clear: Minimum wage is on an uptrend. A recent poll indicates that 72% of voters support raising the federal minimum wage, including a surprising 52% majority of Republicans. So, while the Democrats may not get their way in 2014 (they want a $10.10 federally mandated minimum wage), it is very likely the minimum wage will rise considerably in the not-too-distant future.
Regardless of what's done on the federal level, states are also raising their own minimum wages. As of January 1, 13 states raised their minimum wages, including the highly populated states of New York, New Jersey, and Florida. In addition, 11 other states and Washington, D.C., are expected to consider raising their minimum wages in 2014.
So, while it's true that not very many workers earn minimum wage (about 3% of workers over 25 years old), it's pretty safe to assume that a majority of workers who do earn minimum wage are in the "renters" category. And a higher minimum wage would mean more workers who currently cannot afford their own apartment would be able to if they were making the $10.10 per hour that's being suggested.
How it could affect you, as a renter
The combination of more jobs available and higher wages will create an increased demand for apartments and other types of rental housing. Since the vacancy rate is already at a historically low level, simple supply and demand economics indicate that the price of rental housing could potentially shoot up rapidly over the next few years as these changes take place. Low vacancy and high demand mean more renters will compete for apartments, especially in areas where demand is already high (New Haven has the lowest vacancy rate currently, at just 2.2%).
Another wild card for rental housing is the unstable nature of mortgage rates lately. If developers and investors have to pay more to build and own rental housing, you can be certain the extra expense will be passed on to the renters. A rise in interest rates from 4% to 5% increases the payment on a $100,000 mortgage by $60 monthly.
While no one has a crystal ball that can predict what the economy will do, or what minimum wage laws Congress will pass, or how interest rates might behave, there are definitely signs pointing toward increased demand for rental housing over the next year or two. As a prospective renter, don't be surprised if that apartment you've been considering that rents for $800 per month is going for closer to $1,000 this time next year.