In 2021, the real estate market saw a historic rise in home and rent prices throughout the U.S., leading many to ask if rent prices will continue to skyrocket in 2022. As I argue here, rent must go up!
In recent months, all we have heard about in the business world is the rise in prices and wages. When expenses rise, prices must follow. In real estate investments, the primary costs are insurance, labor and taxes (property tax), which have all gone up in 2021, as well as debt, given that interest rates are expected to go up next year.
With home prices increasing, property taxes are rising substantially.
Investment activity in real estate and migration to the suburbs has increased due to Covid-19, which has created an upsurge in home and rent prices over the last 18 months. According to the National Association of Realtors (NAR), home prices rose in 99% of the 183 markets NAR tracked in Q2 2021, with 78% seeing double-digit spikes in appreciation. As home prices rise significantly, so does the property tax, increasing property owners’ costs and leaving landlords with no choice but to raise prices. This cycle fuels rent inflation, causing rent to rise still further, which could increase property tax substantially.
Costs are up, with supply chain disruptions set to continue into 2022.
In recent months, prices have gone up drastically across the board. Food, energy, cars, semiconductors, materials — everything has been subject to price increases. In November, the National Federation of Independent Business (NFIB) found that 59% of small business owners had raised their average selling prices, the highest reading since October 1979, at the tail-end of the Great Inflation of the 1970s. The NFIB report from June concludes, “The incidence of price hikes on Main Street is clearly on the rise as owners pass on rising labor and operating costs to their customers.”
Wages are up, with no end in sight for labor shortages.
U.S. labor costs have climbed significantly as the economy recovers momentum following its pandemic-induced slowdown. Workers are hard to find, forcing companies to boost wages and benefits. Amid a severe worker shortage, the bureau of labor statistics (BLS) data shows wages surged 1.5% in Q3 of 2021, the highest increase since the department began tracking 20 years ago. According to the Labor Department, the Employment Cost Index, the broadest measure of labor costs, surged 3.7% for the 12-month period ending in September 2021.
Major employers have shared concerns about the possible effects of the trend of hiring difficulties. According to an October Reuters article, “Domino’s Pizza cited a shortage of drivers as it reported recently a rare fall in U.S. sales, and FedEx Corp also cited higher labor costs in September when it cut its full-year forecast.” Similarly, Amazon reported in October that it expected supply chain and labor issues to cost it “billions” in Q4.
Insurance rates will continue rising.
The Washington Post recently found that home insurance policy premiums have risen an average of 4% in 2021, due to “rising material costs, supply chain disruptions and climate change.” In 2020, extreme weather drove a 40% increase in catastrophe losses, according to a study from LexisNexis Risk Solutions, and the National Oceanic and Atmospheric Administration reported in October 2021 that 18 weather disaster events costing at least $1 billion each had hit the U.S. so far that year — a rough few years for homeowners.
As a result of these disasters, compounded by the ongoing Covid-19 pandemic and inflation, insurance companies’ costs have gone up. Everything covered under a standard property insurance policy is now substantially more expensive. With soaring construction costs and a damaged product supply chain, plus backlogs at major ports, all home repairs cost a lot more. It is therefore unsurprising for insurers to predict that the losses they are currently facing will be converted into insurance premium increases for homeowners next year and for the foreseeable future.
FEMA’s new flood risk rating methodology, “Risk Rating 2.0,” will increase many flood insurance policy premiums, particularly in places like Florida, which is facing rising sea levels and climate change.
Housing (shelter) is the single largest component of the Consumer Price Index. Via their impact on rents, higher house prices affect inflation, but with a lag. Research from economists at the Federal Reserve Bank of Dallas supports my conclusions, forecasting that “rent inflation” will accelerate in 2022 and 2023 at the highest rates in more than 30 years.
I predict we will see rent growth continue in 2022 and 2023 due to rising labor costs, property tax hikes, insurance costs and limited supply in many markets in the near future. The suppression of rent payments during the pandemic also contributes to this outcome, as landlords have borne a disproportionate economic burden. So, there will be significant upward pressure on rents, which will only accelerate with the rise of wages and production in 2022, until most supply chain and labor force disruptions fade and there is a return to normal operations and lower inflation pressures.
Founder, CPA, and Co-CEO of Nathan Holdings, a real estate investment firm specializing in multifamily properties.