Landlords are profiting less, renters are paying more

The housing industry had a record-breaking 2020—unheard-of interest rates, nearly nonexistent inventory, crazy home value appreciation. But not all broken records signify a profitable market. In the midst of pandemic eviction moratoriums and foreclosure forbearances, in certain markets, landlords are profiting less, while renters are paying more—often more than they can afford. According to recently released data, neither landlords nor renters are finding the pandemic housing frenzy is working in their favor.

For example, a recent study found that the average annual gross rental yield (annualized gross rent income divided by median purchase price of single-family homes) among the counties surveyed is 7.7% for 2021, which is down from an average of 8.4% in 2020. Within that group of counties, the yield declined from 2020 to 2021 in 87% of counties.

What does this mean for the market?

What does landlords profiting less mean for the housing market? It’s difficult to tell while so much uncertainty remains, but in an already demanding industry where profit margins are often tight, it could inspire some landlords to cut their losses … which could eventually increase inventory. For example, if interest rates remain low, which the Federal Reserve has indicated will be the case for the foreseeable future, would-be renters are better able to buy, reducing demand, and sometimes rents—as metro areas like New York City have seen happen over the last year. Similarly, with lumber prices skyrocketing and shortages of appliances and other home renovation necessities a problem for contractors, rehabbing a tired rental to increase profits isn’t as easy as it was, say, a year ago.

Landlords profiting less in 2020 led analysts to predict more of the same in 2021. Here are some numbers explaining how landlords are profiting less: Potential annual gross rental yields for 2021 fell compared to 2020 in almost 87% of the counties that were analyzed—led by Baltimore City/County, Maryland (yield -43.9%); St. Louis City/County, Missouri (-35.5%); St. Louis County, Missouri (-29.3%); Bonneville County (Idaho Falls), Idaho (-26.7%) and Fairfield County (Stamford), Connecticut (-24%). Among counties with a population of at least one million, those with the greatest decreases in potential annual gross rental yields from 2020 to 2021 include Miami-Dade County, Florida (-19.9%); Oakland County (Detroit), Michigan (-18.6 percent); King County (Seattle), Washington (-17.4%); Palm Beach County, Florida (-14.2%) and Fulton County (Atlanta), Georgia (-13.3%).

The report wasn’t all bad news. For example, Wages are rising faster than rents in 76.6% of the counties that were analyzed, with the highest scorers in Southern California, Arizona, and the Chicago area. Rents rose faster than wages in just 23.4% of the counties that were analyzed, including Harris County (Houston) and Tarrant County (Fort Worth), Texas; Sacramento County, California; Bronx County, New York; and Mecklenburg County (Charlotte), North Carolina.

But many renters are unable to keep up with increasing rents, even those who earn working-class wages and have steady work, according to the Urban Land Institute’s 2021 Home Attainability Index. 

A ULI report based on the index numbers identified 12 occupations that had been affected by the pandemic, and looked at each occupation’s worker wages to demonstrate whether an income surplus (meaning that a household earns more than necessary to afford the given housing type without being cost burdened) or an income gap existed. The occupations comprised three broad categories that could face heightened risks: healthcare workers, frontline workers and workers with elevated risk of income disruption. The report found that a median-wage worker in only three occupations that were examined—geriatric nurse, cardiac technician and long-haul delivery truck driver—could afford to rent a modest two-bedroom apartment in more than half of the regions in the dataset.

Here are a few of the main points from the ULI report regarding affordability:

  • The most severely cost burdened middle-income households are located in cities.
  • The U.S. lacks attainable/affordable housing for critical members of the workforce in all areas and economies.
  • Lower-income households struggle to find attainable rentals in all areas of the country.
  • Segregation—both by income and race—cuts across market types and geographies, and high housing costs threaten to worsen racial and socioeconomic disparities.

The ongoing pandemic has exacerbated and highlighted existing housing disparities, shortages and vulnerabilities. For example, according to a recent analysis of the Census Bureau’s Household Pulse Survey conducted by Zillow economists, more than 3.4 million Americans considered themselves at risk of eviction had the moratorium expired at the end of March. With the moratorium extended by at least three more months, Zillow number-crunchers have determined that as few as 130,000 renter households ultimately could be evicted, depending on the economic recovery and individual landlord decision-making.

Even though more than 8.3 million renters reported being behind on rent payments as of March 15, a small fraction of those renters will actually lose their homes—not all landlords will choose to evict, and also, not all eviction filings result in actual eviction judgments in courts. With no historical precedent for this potential crisis, predicting how many evictions will actually go through once the moratorium expires is extremely difficult, especially with remaining uncertainty around federal policies and how landlords are able to respond.