In normal times, rent prices, like most everything else, slowly yet surely increase at about 2-3% per year. This is inflation. But in terms of the housing market, these aren’t normal times. In the pandemic era, as demand surged in supply-restricted markets, both sale and rent prices soared, with year-over-year inflation rates at 30% or more in some markets. To speak generally of the world of pricing, what goes up might come down. So, when I approached our landlord a few weeks back about lowering the price of our rent, she wasn’t so surprised.
Listen to the Podcast
The Economics of Rent Prices
Imagine a game of Tug of War. On one side is Team Supply, on the other Team Demand. When these two teams are equally matched, there’s little drama. They both tug and tug their hearts out, but neither side makes much headway. A normal housing market is like an evenly matched game of Tug of War, where prices have historically increased at about 2-3% per year. Now, if we pull in a corn-fed bruiser to one side or the other, things get interesting. If Team Supply is strong and Team Demand is weak, prices collapse, as they did during the 2008 financial crisis. If Team Demand drags Team Supply through the dirt, as is the case today, prices surge.
When the price of rent increases, it’s not just the result of landlord greed. As stated above, a moderate degree of inflation is symptom of a healthy economy, with supply and demand in relative harmony. A property priced too high won’t rent, while frothing mobs descend on properties priced too low.
In a supply-restricted market with surging demand—the 2010s and particularly the pandemic frenzy of 2020 through early 2022—prices increase at alarming rates as a natural response to market perturbations. Since 2019, median home prices have increased up to 47%, while rents have increased 30%. With strong demand, only increased supply will cause prices declines. However, increasing housing supply is politically and culturally fraught.
To say the last four years have been unusual would be correct. Rents soared across the nation and continue to rise in certain markets. Locally in the Front Range of Colorado, or at least in our neighborhood, rent prices slipped from previous highs.
Algorithms and Rent Price Estimates
After signing a lease for a Northern Colorado single-family home late last spring, we watched the Zillow rent estimate for our property tumble like me on most boulders throughout late 2023 and early 2024. To be sure, Zillow puts a previously unreachable degree of power into the hands of the consumer through algorithmically driven price estimates. Before these online resources existed, real estate agents, landlords, and property managers operated with much less price transparency. Today, price estimates loosely guide prospective tenants and home buyers, establishing broad baselines for all involved parties.
I say loosely because many claim the Zillow estimates to be unreliable. Landlords, property managers, and seller’s agents claim an estimated value to be too low, while prospective renters or buyers (and their agents) shrug the estimates off as too high. Therefore, it would seem they are probably fairly accurate.
Creating a Rental Comparison Chart
When considering a price adjustment, it felt necessary to anchor the Zillow estimate to active listings. I created a price comparison chart, using the following considerations:
1. Proximity: Nearby properties tend to be more similar in quality and size. Be careful to avoid comparing “nicer” or “worse” properties. It’s a bit of a judgement call.
2. Attributes: Apartments, townhomes, and condos aren’t single-family homes. After filtering for single-family homes, I searched for properties with similar bedroom and bathroom counts, and ideally similar square footage.
3. Normalization: The list price of a 3,000-square-foot home can’t be directly compared to one with 1,500 square feet. The list price divided by square footage provides a price-per-square-foot ratio (PPSF), a much more useful guide to comparing rates across properties with varying attributes, sizes, and locations.
Price Per Square Foot (PPSF) = List Price ($) / Square Footage
Sample size is important. While I’m no statistician, I know that greater sample sets yield more reliable results. Alas, these were the only active and comparable listings in our area at the time of analysis. Below is a screenshot of the price comparison chart:
Rent Price Normalization
The key column to consider is the price per square foot (PPSF), a figure used to normalize the value of variably sized properties. The ratio should only be applied to similar properties, ideally in the same neighborhood. For instance, the PPSF in the trendy mid-town neighborhood with chic bars and restaurants can’t be fairly compared to, well, you get the idea.
The PPSF is much more useful than a list price, but context is still important. List photos and descriptions may shed more light on a property’s value. For instance, a property with granite countertops, brass finishings, and stainless appliances can and should fetch a higher premium than one with dirt floors, washboards, and an outhouse, even if the size and bedroom/bathroom count are the same.
Suburban developments, with homes built at a similar time and in a similar style, tend to be less variable than recently gentrified city-center neighborhoods. In the latter case, multi-million-dollar architectural masterpieces often tower over buildings that are not multi-million dollar architectural masterpieces.
Trends Emerge: Finding the Market Price
With a normalized price ratio, some trends emerge. Most analyzed properties clustered around $1.20 – $1.30/sq ft. Those listed above $1.30/sq ft appeared to be sitting with fewer inquiries or applications, suggesting overvaluation.
The average (and median) price/sq ft of the analyzed properties was $1.24/sq foot. Our rental, priced at $1.47/sq ft, was considerably higher than all but one active listing. Using an average (and median) value of $1.24/sq ft, I found the Zillow estimate to be accurate, if not a bit generous to the property owner. Using both the Zillow estimate and my comparison of active listings, I had a clear case to suggest above-market value rent. Now came the delicate task of massaging.
Now, how was I going to write a victory speech for my landlord about losing money? People hate losing money.
Rent Price Negotiation
Our landlord is fantastic. Generously, she has provided battery-powered lawn care equipment (roughly valued at $1,000) and continues to reimburse us for air filters and new fancy inset light bulbs. She doesn’t charge pet rent and only collects a modest (and refundable) one-time pet deposit. We have an unusual degree of stability for a rental: the owners purchased this property last year with the sole intention of being a long-term rental. We are the first tenants. Put another way, we could conceivably live here for years, enjoying the stability of home ownership without the exorbitant cost of buying*. We’re lucky.
The idea of floating a rent reduction didn’t give me the warm and fuzzies. I don’t really enjoy negotiating. I find it a bit contentious, if I’m being honest. Anyway, I’d never asked for a rent reduction, and neither had any of my (informally) surveyed friends or colleagues. I at times even wondered if I was being a cheap-ass. But damn if I’m not fascinated by the tides of market seas, always washing in this or that. My number one goal, aside from paying lower rent, was not to piss off our amazing landlord.
*As an aside, to buy this exact property with a conventional loan at the time of writing, our housing expenses would increase by 40% for fixed expenses alone (mortgage, HOA, insurance). This figure excludes the costs of maintenance, repairs, or any discretionary upgrades, renovations, or Moon Boards. Same house, same life, just 40% more expensive.
Both Sides Must Win
While I’m no expert, I’ve learned that successful negotiations happen when both sides feel they’ve gained something. Getting our way at someone’s expense is a losing game. Even if we win—and we probably won’t—we risk damaging relationships. In a recent podcast interview, legendary negotiator William Ury repeatedly declared that successful negotiations begin with writing the other side’s victory speech.
Now, how was I going to write a victory speech for my landlord about losing money? People hate losing money. I chose the angle of stability. As a landlord myself, I can’t overstate the value of stable and reliable tenants. Perhaps the bar is low, but a drama-free and reliably paying tenant is a breath of fresh air. Trust me, I have heard some horror stories. We promised to treat this property as if we owned it. And we do. I’ve done some simple and routine maintenance myself, finding it silly to bother her with clogged sink drains or that damn gate latch. And most importantly, we pay on time and in full. Losing us over a modest rent reduction would mean she’d have to take her chances with those faceless shapeshifters on the open market. But I didn’t want to back her into a corner by making this explicit.
I chose to present my case via email. One, email provided a paper trail and time stamp should we need it. Perhaps most importantly, a written proposal laid out the evidence diplomatically while offering her time to think it over. Ultimately, I wanted to discuss this via phone or in person, but I didn’t want to catch her off guard. Below is a (slightly redacted) copy of the email:
Hi Landlord,
I want to begin by expressing the joy and pleasure of renting with you. We find you an incredibly agreeable landlord, and we love the neighborhood. We are friends with the neighbors, and we treat this home as if it were our own.
Looking at the year ahead, yes, we’d prefer to renew. That said, market conditions now appear to support a monthly rate lower than [current rent] for this property. The current Zillow Rent Estimate is [suggested lower rent] (steady for months now), which seems fair given the comparison I’ve put together (attached).
(Screenshot of chart)
From the current listings in this area, I’ve found a ceiling at about $1.28 – $1.29/sq ft. Properties listed higher are sitting longer, while most are listed in the average range of $1.22/sq ft. For this property, that would result in a list price of [square footage multiplied by 1.22].
Carrying on, there are many tangibles and intangibles I want to consider:
-You’ve provided nice (and expensive) lawn care tools
-You are excellent at responding to any maintenance needs
-You allow our dog!
-Probably many others I’m not considering
So, we’re not at all trying to play hardball here. We want to continue living here, perhaps for years to come. Would it be possible to start a conversation about the rental rate for the next year? Any concession would be immensely appreciated.
Kind Regards,
The Clipping Chains Family
The Result: Cheaper Rent
This post is getting long, so I’ll cut to the chase: it worked. We scheduled a call and talked it over. She’d gone as far as to drive the current listings I’d analyzed, ensuring the comparisons were valid. She even reached out to a property management company. The company provided a slightly higher estimate than Zillow’s algorithmically generated figure.
In the end, we reached a deal better than I’d hoped. My goal was to land somewhere between the Zillow estimate and our current rent, and we ended up much closer to Zillow’s figure. We just signed an updated lease with a 10% reduction in rent.
Housing costs are generally the biggest of the “big three” spending line items for anyone, anywhere. Any dent in a high-impact revolving expense is a winning proposition. While 10% might not feel huge, the savings in our case add up to thousands of dollars over the year. It’s far from splitting hairs.
While it undoubtedly stings to lose revenue, our landlord secured another year of stable rent at a fair market price. She recognized the winds of economic change, realizing that losing us would force her to lower the rent regardless. We both won.
Searching for Opportunities in an Expensive Housing Market
The housing market of recent years has been hard on nearly everyone. While the American economy is otherwise shockingly strong and resilient in the face of pandemic-related strains, the cost of housing remains a painful and unavoidable exception. We all must live somewhere, and no one lives for free.
For those renting—which I would recommend over buying in this interest rate-burdened market—look for ways to reduce costs. Have rental rates changed since last signing a lease? Do opportunities exist to provide stability to a landlord while reducing your costs? If so, find a way to diplomatically state the case without being accusatory. Ultimately, we all seek stability, security, and fairness, in our own ways.
As a fellow renter, I found this incredibly helpful. Lease renewal season is an extremely stressful time for me. You have just given me an evidence-based way to manage these situations. Thank you so much for this post.
My pleasure!