Over the last few years, numerous news stories have addressed the escalation of rental rates in housing markets across the country—and particularly in Southwest Florida. Unfortunately for our local consumers, many of the municipalities that have experienced the greatest increase are in the Sunshine State. In spring 2022, after doing several interviews for various media outlets across the state and discussing the situation with Bennie Waller of the University of Alabama and Ken Johnson of Florida Atlantic University, I agreed to embark on a project examining these rental market outcomes.
Instead of following the typical academic research pattern, where sophisticated econometric modeling is a prerequisite for publication in highly rated journals, we developed a rental index that provides easily understandable insights to help the public make more informed decisions. While the decision to focus on creating a practical tool was a good one, as academics, we failed to escape our creative limitations in selecting a name, deciding to call it the Waller, Weeks, Johnson Rental Index.
The methodology for our index is very straightforward: We use historical market rents from Zillow to project current rents. We then compare projected rents to actual observed rents. The deviation between these two numbers can be viewed as a rental premium when observed rents exceed the projected, or a discount when projected rents exceed the observed. In the nation’s fastest-growing markets, the premiums reflect the degree to which demand is outpacing supply, resulting in upward pressure on rents.
The values generated by the index in April 2023 reflect the severe nature of the housing crisis in the United States. Looking at the top 100 housing markets, only Stockton, California, had current rents below the projected level. Every other major market had rental rates at a premium, with the two largest being in Miami (10.84%) and Cape Coral (14.33%).
To add contextual insight, we include income values for each market. These numbers reflect the minimum income required not to be considered “rent burdened” or “severely rent burdened.” HUD defines affordable housing as housing cost, including utilities, equal to or less than 30% of occupants’ gross income. This 30% limit is referred to as “rent burdened.” “Severely rent burdened” is defined as cost equal to or greater than 50% of occupant income. In April 2023, an income of $92,905 was required in Cape Coral for a household not to be considered “rent burdened;” it was $112,184 in Miami. To avoid being “severely rent burdened,” one must earn $55,743 in Cape Coral and $67,310 in Miami. Our index doesn’t include utilities, which understates the level of income required to avoid being “rent burdened” or “severely rent burdened.”
The index signals that specific markets, such as Cape Coral, will face challenges moving forward. Adding more housing to a market usually takes years to accomplish. In the interim, renters will see their budgets stretched to the point where difficult choices must be made. Additionally, employers will face increasing difficulty recruiting and retaining employees.
Interested readers can find the Waller, Weeks, Johnson Rental Index at fgcu.edu/cob/lucas/overvalued-rental-markets.
H. Shelton Weeks is a professor of finance and director of the Lucas Institute for Real Estate Development & Finance at Florida Gulf Coast University’s Lutgert College of Business.
