California’s rental market is eyeing you from across the bar, but they’re giving serious mixed signals. Do you approach?
If the market were a dating game, rent prices would be a good indicator for the approach.
Nationally, year-over-year rent is up 5.7% but rents are down, 0.7% month-over-month as of October 2022, according to RentCafe. These seemingly mixed signals paint a halting picture of today’s rental market.
After a meteoric rise, these two metrics indicate the rental market is quickly cooling down. California’s rental price growth has slowed significantly over the last six months. The California metros with the fastest drop in rental prices as of October include:
- Riverside;
- Sacramento;
- San Francisco; and
- Los Angeles, according to RentCafe.
At the top of 2022, these same metros were initially noted as the fastest growing rental prices. But the Federal Reserve’s (the Fed’s) unwavering resolve to snuff out inflation with interest rate hikes is also extinguishing rental price growth for landlords.
With the winter season fast approaching, snowballing rental price gains are finally melting. In fact, densely populated markets like the Bay Area have already dipped dramatically.
From March 2020 to October 2022, rents in this region cooled down immensely with:
- Oakland rents down 12.2%; and
- San Francisco rents down 9.7%, according to RentCafe.
Industry professionals can’t blame the slowdown entirely on the pandemic effect as it only accelerated the inevitable. California residents have long been squeezed into overpriced and limited housing stock after years of underbuilding and historically rigorous zoning restrictions.
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Obstacles for renter recovery
The sudden rent slowdown is by no means a sign that California is reaching a housing equilibrium. In fact, the worst of the shortage is yet to come — most Southern California cities are nowhere near completing their future housing element plans. About two-thirds of local governments in SoCal completely missed their October 2022 housing element deadline.
The state’s rental slowdown signals modest price decreases ahead, but 2022 is still on track to be one of the fastest years for rent growth in California.
Legislators need to address the core issue by removing hurdles to construction and expediting the homebuilding process. Without addressing housing policy issues at the local level, California’s already low vacancy rates stand to worsen for low- and middle-income earners.
Though, local housing policies are not the only reason the rental growth is slowing down. More broadly, California’s population growth is diminishing thanks to a host of factors, including:
- younger generations waiting longer to start families;
- California’s Baby Boomer population aging in place;
- slowing immigration; and
- famously overpriced housing stock.
2022’s renters see little choice but to renew their leases as unemployment, underemployment and mortgage interest rate hikes dominated the year’s news cycles. Renters considering traditional financing for a home will find their purchasing power deeply diminished. As of November 25, 2022, the average 30-year fixed rate mortgage stands at a whopping 6.58%.
All factors point to bloated home pricing that won’t deflate until 2025. One important housing health metric to watch for in the upswing is jobs. When long-term employment figures pick up, real estate transactions in that service area are soon to follow.
When Californians are no longer spending more than 30% of their monthly income on rent — also known as being cost burdened — residents are better able to save for a down payment and participate in their local real estate market as buyers.
Until jobs in the state recover and California picks up on construction, the state’s rental market will continue to snail. In the meantime, sales agents can expand their real estate income with related skills and opportunities to survive this transition to a buyer’s market.
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More California renters, homebuyers are cost burdened than ever before
