Rents Signal A Car Crash in 2027. But It's Not What You Think.

Welcome to the Skeptical Investor Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

This week, we’re talkin’ rent growth (or lack thereof), new housing construction and completions are out of balance, and we have a new housing proposal from the Administration. What is it all about?

Let’s get into it.

Before….

After…

Rents stagnating (and falling in some markets) in 2025 are a pleasant surprise for tenants, and perhaps confusing for landlords today.

But in reality, it is a concerning market signal, a red flag in front of an underlying problem with housing supply.

And this car crash is less than 1 year away.

Go with me here.

The supply of housing is high today, in most markets. This is being catalyzed by stubbornly high interest rates; many folks want to buy a house, they have the down payment, but cannot afford the mortgage payment.

And the supply of housing can have an outsized effect on both the price of housing sales and rents.

We can see this in the falling growth of rent costs.

Rent costs appear to be growing year on year, but the trend is strong to the downside. And in reality, this number is likely much lower, near zero IMO.

Why? The data kinda sucks.

Remember, this data lags severely because 1) lease renewals are 1 year long and front-loaded to the spring/early summer season, and 2) BLS data is a “best guess” based on surveys, which fewer and fewer folks respond to.

Oh, and 3)…we have a government shutdown, aka congressional foodfight, happening now, so we are missing the latest monthly inflation estimates.

Cool. Cool.

So for 2025-2026, we will continue a more moderate rent growth to flat. Maybe even some ever so slight deflation in certain regions of the US.

For the first time since 2009, apartment rents specifically were (slightly) negative during a Fall period (Parsons). (We have access to better data from private industry apartment providers).

Apartments will experience the greatest effect from today’s heightened housing supply.

But remember, this is nothing like the 2008 GFC and frankly anyone who is comparing it to that is uninformed.

According to housing economist Jay Parsons, “Unlike 2009, in 2025 we still see: a) Flight to quality over a flight to affordability (move-ups) b) No sign of renters doubling up c) Very low renter turnover d) Improving rent-to-income ratios…..There are no material signs of a demand-side slowdown…” and “…is far more related to supply being at the highest levels in a half century.”

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COVID-era 0% rates spurred developers to build furiously. All that inventory started coming on the market late last year, and will continue for the rest of 2025 and part of 2026, as I’ve written about before.

My home market of Nashville was one of these hot apartment construction markets in 2021 (Parsons).

Look at that, the top 5 markets DOUBLED the number of apartment housing units. This is why we hear about places like Austin blowing up (still a great market to invest in, by the by).

And in many of those markets, we see rents for modest (C-class) apartments falling.

**Note: Nashville is not on this list, despite us building so many apartments. We don’t build much C-class housing. Here its higher-end, which pencils better for developers (and with record low unemployment, folks here can afford it). Often, Government incentives are pretty much required to build C-class housing, unfortunately. The numbers just don't work. Conversely, this provides a great opportunity for smaller investors (like me) to offer modest rental products; my small and medium-sized multifamily properties are always in high demand.

Ok back to it…

Beginning in late 2026 and continuing in earnest in 2027, we will be back to a housing supply shortage.

Why?

It takes ~a year to build a house, and 3+ years to build an apartment (much of both is regulation).

And what happened 5 years ago? Interest rates go bang DOWN! Builders built and that supply is still coming online.

And then what happened 3 years ago? Interest rates go bang UP! And the faucet of new building projects closed to a trickle. Starting construction of new buildings plummeted.

Just check out the prolonged drop in new units being completed (YoY % change).

New housing completions peaked last year. And it’s going to be only down from here. (notice that little pop-up at the end? That's rates coming down from 8% to the low 6’s. This matters because if we get to 5% in 2026, the new housing market could recover).

ZERP, aka 0% interest rate policy, was wild.

But we have been stepping on the neck of builders for 3 years, and 2027 will bring an extremely restricted supply. Especially if the Fed continues its uber-slow interest rate relaxation rollout (say that 10 times fast).

Of note, even with all this, the demand for apartments is not really plummeting. We see this in the lease renewal data: “Renters continue to renew leases at unusually high levels. Retention went up again in Q3. That is not something we’d see in a typical demand-side slowdown. No signs of mass move-outs or of renters doubling up to save cash. -- Renewal rents continue to climb at a normal-ish rate of 3.7%, nationally, according to housing economist Jay Parsons.

We also have an abnormally high number of people coming of young adult age in the GenZ population who are leaving the nest, further propping up rental demand.

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Ok, back to business.

Last week, the Administration announced a new housing initiative to force homebuilders to build more homes, pointing out that they allegedly are sitting on 2 million lots they have yet to build on. We saw this announcement first from the President and then a follow-up from Bill Pulte, the Federal Housing Finance Agency Director, saying the Fannie an Freddie would engage developers.

Now it is true that total housing permits to construct are still way down, near the level of previous recessions, historically.

But can the Federal government properly force (or incentivize) builders to build more homes?

I am dubious.

Until I see any concrete plan, this 2-million-lot push has no bite and all bark. And barring some new historic declaration of a housing emergency + funding/incentives (which Treasury Secretary Bessent said they may do), I think this is a nothing burger.

Right now, builders have an extraordinarily high number of completed units, both for sale and on sale. They are still offering low-interest-rate incentives to get their inventory off their books, something they must do before they can even think about boosting new construction. There is no incentive for them to go on a building spree, especially during a high-interest-rate environment in which the consumer appears to be weakening.

And yet, here is Director Pulte asserting that builders have a public responsibility to build.

We will see what the administration comes up with, but so far, any plans lack detail.

First and foremost: NO, we are not in a “bubble.” Frankly, that is ridiculous.

People talk about a bubble. But what is a bubble excess supply, because expected demand does not materialize, and then the supply continues expecting demand to come, but it does not.

That happened in 2005-2007, the demand from wildly out-of-control mortgage lending was expected to continue. When it did not. Crash.

This is not that. I bristle when people compare numbers/data to the Great Financial Crisis.

And for the investor who is ready to take advantage of the forthcoming supply shortage, the next 6 to 18 months will be important for investors/landlords.

I made this declaration back in June.

So as we enter the slow rental season, rental data will unfortunately be relatively quiet; it won’t provide much helpful new data until the Spring. Which is when, coincidentally, Fed Chair Jerome Powell is out of a job and the Administration installs someone much more apt to lower interest rates quickly. Also bullish.

For me, as an investor, my eyes are focused on the labor market and how well the economy holds up until then.

My hands, as an investor, are busy running numbers on my next property deal and hopefully securing it before then. I'm finishing up my current project this month (will send a few pictures soon).

And while I don't count on or try to time investments, the timing happens to be ripper than the peppers and tomatoes exploding in my backyard (see obligatory picture below). Time to make some hot sauce, this Spring is going to be spicy.👇

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

Herzliche Grüße,

-The Skeptical Investor

P.S. If you need a little push, here is my new book! It is a MUST for all real estate investors. The 5 Ways Real Estate Investors Make Money and Build Wealth: Anyone can create wealth through real estate. Including You! (yes yes, it’s a shameless plug, but we authors make ~$1/book, FYI. This is about education!). So pick your copy up today!

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