The costs of renting were going up before inflation, now things are getting even scarier. I live in the midwest, where costs of living are significantly lower than in other areas of the United States. Even in my area, rent prices have increased 8% over the past two years.
Housing is a pretty popular topic at work. Lately, some of those conversations have helped me think about things to keep in mind if you’re in the market for a new lease.
New Construction Is Stalled & Expensive
There is a debate on if there is a housing shortage currently, with many agreeing that we are about 1.5 million homes short to meet demand. In any case, a lot of people want to increase the housing supply but the supply chain for construction companies is snarled, leaving it very expensive to complete new projects.
My theory is because commodity prices are up across the board, real estate developers and construction workers will prioritize the most profitable building projects which typically go to people building luxury apartments as investments or mega-mansions who would never struggle in this market anyway. This prioritization doesn’t help people like myself who want to save costs, new construction is going to cost more, but it costs even MORE if all of the construction consists of luxury apartments.
Many developers have a backlog of projects right now so I wouldn’t expect any capacity that’s added to the rental market to be budget-friendly any time soon. If developers are a national force I would expect them to focus on the HCOL areas such as major coastal cities or hot cities like Nashville or Austin. The midwest is unfortunately towards the bottom of the priority ladder.
The low availability of single-family homes drives a lot of would-be home buyers into the rental market, further taking away available apartments from habitual renters. These would-be buyers typically have higher incomes and are willing to pay more for rent, so their influx into the rental market drives rental prices higher.
There Is Available Housing – Just Not Where We Want To Live
People congregate in areas with lots of jobs, good school zones, and vibrant communities. Everyone wants to live in a place like that! That’s part of the problem, there’s usually not a lot of space to add new developments in these areas. Housing outside of highly desirable places to live is cheaper, but because no one wants to live there.
I experienced this growing up in what most would consider rural Tennessee. I thought housing at college was expensive, then I moved to the Detroit metro area and got sticker shock here. Coming from an LCOL area makes it difficult to fork over the amount of cash it takes to live in popular areas for young professionals here; so I don’t.
I chose to live about 15 minutes north of where a lot of people choose to live because the over cost is lower and I get more for my money. Currently, I’m paying around $1.71 per square foot. According to rentcafe.com, the average rent per square foot in my city is $1.43. Really I’d say my apartment is pretty below average quality-wise so I should probably look to move when my lease is up!
Are You Overpaying For Rent?
Rent prices are all relative to your location. I can’t compare the price of a one-bedroom apartment in San Francisco to a one-bedroom apartment in Louisville, Kentucky. It’s just not a fair comparison as you’re probably not about to choose between living in these two cities.
Find the average price per square foot in your city, and shoot to pay around 20% less than that. Looking at my current situation that means I should really be paying closer to $1.14 per square foot if I want to stay in my town. If I want to move around it could be a different story. You have to decide on the location that works for you.
I want to keep my housing costs to a maximum of 15% of my gross income to allow me to really save a significant portion of my salary. I encourage you all to do the same to be one step closer to securing that F-You money!