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Missed Rent Payments May Balloon as Boosted Aid Expires, Holding Potential for Deep Scars in the Rental Market

Zillow Research
  • Amid record unemployment, 12.4% of renters missed payments in the first two weeks of July, up from 9.9% last year. Missed payments are expected to increase after additional unemployment benefits expired on July 31. 

  • A surge in missed payments has the potential to start a ripple effect felt by rental industry workers and others who rely on the rental industry. The average profit margin for a rental unit is 6.4% — less than half what it was five years ago.

  • An estimated 53.8% of rental income is typically spent just on fixed costs of property ownership that landlords are responsible for (mortgage payments, property taxes, maintenance, insurance and capital improvements).

As 32 million Americans received unemployment benefits in late June, more renters were late on their July payments than any other time during the coronavirus pandemic. Boosted government aid has expired, meaning those numbers are likely to rise even further in coming months. Those missed rent payments could cause a wave of housing insecurity and have the potential for deep impacts not only for renters, but also for rental owners who owe common costs of property ownership and other workers in the industry. 

During the first week of July, 22.6% of U.S. apartment households did not pay any rent. That's up from 19.2% in June and higher than in any month since at least March. By July 13, the share of renters that hadn't yet paid fell to 12.4%, 2.5 percentage points higher than the same period last year. Two million people continue to apply for unemployment benefits weekly and recent estimates show half of all U.S. households have lost income during the pandemic, making it likely that government aid has played a crucial role in preventing the share of unpaid rent from ballooning even higher. 

Much of that aid expired at the end of July, edging toward the possibility of a fiscal cliff that will cause unpaid rent figures to rise significantly in the coming months, barring a dramatic recovery in the job market. That would have severe consequences for renters who are missing all or part of their paychecks, and has the potential to start a ripple effect felt by many others who rely on the rental industry.

The rental market has been more affected by the coronavirus pandemic than the for-sale side appears to have been. The steady climb of the past few years has come to an end as rent growth has slowed nationally and prices have outright fallen in a few markets. Government aid and eviction freezes have provided a lifeline for those who are out of work. But much of that aid has expired, putting many renters and workers who rely on the rental market continuing apace in a vulnerable position.

Rent prices have slowed during the coronavirus pandemic, but likely not enough to provide any real relief for renters who are missing paychecks. The typical rent in the U.S. has fallen $5 this spring to $1,723 a month, or $20,676 per year. 

For landlords, most of that potential rental income is absorbed by common costs of property ownership. More than half (53.8%) of the income from a typical rental unit normally goes toward fixed costs associated with property ownership. These expenses include mortgage payments — though many owners are likely to have reached a temporary forbearance agreement — property taxes, maintenance, insurance and capital improvements

That's before accounting for other costs of running a rental business like staff wages or management company costs, business taxes, legal and accounting services, landscaping, and more. In total, the average annual return on a rental unit is 6.4%. In 2015, it averaged 13.3%, meaning the margin has fallen by more than half over that time

Widespread missed payments with many renters facing major financial hardships could have far-reaching effects. That's especially true for smaller landlords, who likely have bigger per-unit margins because of their typically lower variable costs, but are less able to withstand missed income from a vacant unit or a renter unable to pay because they don't have the safety net provided by owning several units. 

The post Missed Rent Payments May Balloon as Boosted Aid Expires, Holding Potential for Deep Scars in the Rental Market appeared first on Zillow Research.