This article was posted on Tuesday, Nov 01, 2022
Rental Market

While the housing market has been cooling off mostly due to higher interest rates, the rental market is white hot! Bidding wars on rentals are driving up the market for newly listed properties.

When the pandemic hit, we had historically low inventory throughout California, historically low interest rates and huge buyer demand.  This resulted in red-hot housing markets where properties appreciated in price between 20-40% year-over-year.

The sharp increase in home prices, coupled with competition from all-cash buyers, pushed many fist-time buyers out of the market entirely and even sidelined some deal-seeking investors.  An entire cohort of would-be-buyers had to remain renters, creating an even greater demand for rental housing, which in-turn drove up rental prices.

Interest Rates

Higher interest rates are helping to create another wave of renters.  At the beginning of the year, when interest rates were at 3%, the monthly mortgage payment on the purchase of a $1M home with 10% down would have been $3,867.  With interest rates as high as 6% (and potentially going higher before the end of the year), that same $1M home purchase is going to have a monthly mortgage payment of $5,498.  That’s $19,572 more per year for the same home – a 42% increase.  This increase in payments can have a significant impact on a household’s budget.

Many buyers who were shopping for homes at the beginning of the year, when interest rates were lower, but didn’t purchase a home either because they didn’t find what they wanted (there wasn’t much to choose from) or they were out-bid on homes that they tried to purchase, no longer qualify for the same loan amount.  

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To maintain the same $3,867 payment at a 6% interest rate with 10% down, a buyer would only qualify for a purchase price of $721,000.  If a buyer had trouble finding something they liked in the $1M price range, they’re not going to find something they like for almost $300,000 less, and to make matters worse, property prices have continued to rise steadily, just at a slower rate than last year.

The cost of home ownership doesn’t just end with the mortgage payment.  Average annual taxes and insurance on a $1M home in California would represent another $11,000+ per year and if you have HOA dues and/or Mello Roos taxes, that could add another $4,400-$9,800 in annual costs.  

Rent vs. Buy

When most people buy a new home, they usually like to invest in updating it, and then there’s always the unforeseeable upkeep costs that need to be accounted for.  All said and done, for many people it makes more sense to rent than to buy right now.

While savvy real estate investors tend to emphasize asset appreciation and the value of leverage, most home buyers are looking at monthly payments and having extra money left over for discretionary spending, so the above numbers are enough to keep them out of the purchasing market.

The rise in interest rates is not only affecting the purchasing power of entry level buyers, but also impacting mid-level buyers who are choosing to rent and wait for interest rates to go down.  With higher-income earners increasingly entering the rental market and competing with people who traditionally rent out of necessity, the demand for rental housing is growing — which is also pushing rent prices up even higher.

As an increasing number of Californians are becoming renters, it’s important for property owners to be pro-active and vote for lawmakers who seek to uphold property owner’s rights. We need to become a culture where housing providers are recognized for their vital contribution to society and our economy and are allowed to charge fair market rent, and expect tenants to abide by the terms of their lease — including taking care of the property and paying rent on time.  Is that too much to ask for?


Mercedes Shaffer is an Orange County real estate agent helping you build wealth one door at a time. If you have questions or comments she can be reached by phone or text at 714.330.9999, by email at [email protected] or visit her website at Mercedes Shaffer is an agent with Pacific Sotheby’s International Realty and specializes in helping clients buy and sell real estate and perform 1031 Exchanges. DRE 02114448.