No doubt, you are already grumbling about rising gas prices. You may even complain about your inflated grocery bill. However, there’s one other major cost on the rise this year: rent. Depending on where you live, the increase on rent could have a very powerful effect on your budget.
According to Zillow, median rent went up nationally by about 3% last year. The median doesn’t give full justice to how much rent has increased in some locations. In Orange County, CA, rent has increased up over 13%. Minneapolis, MN saw over 11% for rent increases. Chicago, IL topped out just over 9%.
While the percent increase in gas may seem more alarming, it is important to put these expenses into perspective. Housing is the largest total expense by far in the average budget. Transportation comes in a distant second and fuel is only a portion of the transportation category. In other words, small increases in housing costs have big impacts on your budget.
The important question to ask is why.
Places that have seen some of the largest rent increases are the same locations with the largest foreclosure rates. When homeowners are faced with bankruptcy or foreclosure, they usually have no recourse but to become renters. After all, no bank is going to hand out a mortgage to someone who just defaulted on one.
A sudden spike in once homeowners-now-renters increases demand, which means increase in price. This reality is evidenced by record low vacancy rates.
The recession was a double-edged sword for rent prices. The economic downturn converted homeowners into renters, but it also dried up interest in new construction. With rapidly falling housing prices, there hasn’t been a lot of interest from landlords in purchasing and building a new supply of apartments to meet the new demand. Stagnating supply all but guarantees an increase in rental prices.
As the banking industry reeled from distressed mortgage portfolios, government and the Fed have tightened requirements for new mortgages. Prospective homebuyers now need more money for down payments, are able to get less in seller paid concessions and must have higher FICO scores. For many prospective buyers, the economy has exacerbated the difficulty in reaching these more stringent requirements.
Since attaining a mortgage is essential for keeping renters in the rental market and preventing new landlords from acquiring new units for rent, the ability to attain new mortgages has impacted the supply and demand for rental property.
Your housing expenses are about to go up in 2012 and there’s not much you can do about it.
Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.