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Why Homeownership Decline Is Only Temporary


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2011 Dec 19, 11:26pm   8,415 views  20 comments

by toothfairy   ➕follow (0)   💰tip   ignore  

There’s a lot of hoopla about the pending death of homeownership in America; but is that just a lot of hype? According to Morgan Stanley analyst Oliver Chang, the housing industry can expect to see a drop in homeownership to 60 percent from its peak of 69 percent.

Chang said there are roughly 7.5 million households either in foreclosure or delinquent on the mortgage. With the majority of these borrowers forced to pay rent over the next five years as their credit heals, this would equal $72.7 billion in incremental rent payments instead of mortgage payments.
The government is moving ahead to take advantage of the increase in demand. It’s currently developing strategies to rent more of the thousands of government-owned foreclosure properties.

The big problem here is that while it may be a good move to temporarily rent while improving credit and finances, the shift of 7 million households into the rental market could send rental prices skyrocketing. Once rental prices exceed the cost of owning a home, renters will once again flock back to home ownership, even if loan terms aren’t as favorable as they are today. That’s not to mention the special relationship that Americans have with homeownership. Unlike many western European countries, homeownership is considered a rite of passage by most Americans, including young Americans. So it’s not likely we will see a permanent shift in attitudes towards homeownership anytime soon.

For REO investors watching the current developments, considering multifamily structures could be a smart move. According to Chang, rental properties could experience a spike in value, even if temporarily while Americans forced out of their homes because of foreclosure regroup in apartments or rented single-family houses.

http://www.resg.info/why-homeownership-decline-is-only-temporary/

#housing

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1   edvard2   2011 Dec 20, 1:02am  

The argument that generally floats around the housing debacle isn't about overall home ownership per capita, but rather that the crazy speculative frenzy and out of control housing bubble it created will likely not return. Personally I fail to see anything wrong with a balanced, more affordable, more stable housing market overall. I have no problem with people buying homes.

The belief that everyone will be forced to rent and rents will seemingly naturally skyrocket hasn't really happened. The reason is because you need a healthy job market with rising wages in order for that to happen. Supply is only part of the equation. Sure- there might be more renters but if its because the renters in question got kicked out of their houses because they couldn't afford them then why would they suddenly start paying more to rent? They're broke or in poor financial straits. It could more logically be argued that rents could fall as more people with less than stellar fiances hit the market. Rents have risen here in the Bay Area, but not that dramatically.

2   toothfairy   2011 Dec 20, 3:19am  

edvard2 says

but if its because the renters in question got kicked out of their houses because they couldn't afford them then why would they suddenly start paying more to rent?

In the bay area it can cost half as much to rent as they were paying in mortgage payments so even if they couldn't afford the mortgage there's still plenty of leeway to pay higher rent.

3   edvard2   2011 Dec 20, 3:45am  

toothfairy says

In the bay area it can cost half as much to rent as they were paying in mortgage payments so even if they couldn't afford the mortgage there's still plenty of leeway to pay higher rent.

But a LOT of the homes that were "bought" during the bubble were done so using exotic mortgage products, thus the actual purchasing power of a lot of those buyers in reality was significantly less and thus not enough to buy the aforementioned houses. In the case of renting there is no such thing as getting a loan or whatnot. You HAVE to pay the rent. So in that case the actual purchasing power of the renters in question is crucial and since their's was less... rent will also be less.

4   Katy Perry   2011 Dec 20, 4:05am  

Most people don't even know what a real home owner is.
I think you mean Home Loan Owner?
Debt is slavery

5   thomas.wong1986   2011 Dec 20, 4:17am  

toothfairy says

In the bay area it can cost half as much to rent as they were paying in mortgage payments so even if they couldn't afford the mortgage there's still plenty of leeway to pay higher rent.

Sounds like we will see rents decline to be more competitive with home purchases. Demand curve continuing to shift as price of substitute goods are falling.

6   bob2356   2011 Dec 20, 5:37am  

toothfairy says

The big problem here is that while it may be a good move to temporarily rent while improving credit and finances, the shift of 7 million households into the rental market could send rental prices skyrocketing.

Why? If 7 million people lose a house in foreclosure then the vast majority of the houses they now occupy will come onto the rental market. The investors buying these properties aren't going to live in them.

7   MattBayArea   2011 Dec 20, 6:00am  

toothfairy says

the shift of 7 million households into the rental market could send rental prices skyrocketing. Once rental prices exceed the cost of owning a home, renters will once again flock back to home ownership, even if loan terms aren’t as favorable as they are today

This doesn't seem like the correct conclusion to me - either former renters are buying these houses (no effect on home ownership rate) or investors looking to turn around and rent the house out will buy it (increased rental unit market proportional to the decrease in home ownership). This, combined with the bottom-line fact that people in the lower and middle economic brackets (who rent) are making less money, should keep rent steady or even declining.

Granted I don't see any data for declining rents... I'm just skeptical of that logic. Perhaps in the short term, as millions of homes are in limbo-land, there will indeed be increased pressure on rents that will only dissipate over time (less rapidly than it should) ... but more people are moving in with family, right?

9   everything   2011 Dec 20, 7:00am  

In the news today, multi-family construction is up, why?, because rents are up, rental vacancies are down, and values are up, investors, they just follow the smell of money. More people will just live together because of low wages and high rents. I'm living in a 900 sq. ft. abode, now out of 5 of these units, two now have 5 people living in each one whereas two years ago all 5 had one person living in each one, also two out of 5 have become rentals.

10   tdeloco   2011 Dec 21, 12:34pm  

toothfairy says

7 million households into the rental market could send rental prices skyrocketing

Oh geez, an extra 7 million households wanting to rent! But the bigger question to me is, what will happen to the 7 million houses that they had just vacated?

11   propmgrjay   2011 Dec 21, 12:49pm  

tdeloco says

what will happen to the 7 million houses that they had just vacated?

They'll likely turn into rentals.

12   tdeloco   2011 Dec 21, 1:03pm  

propmgrjay says

They'll likely turn into rentals.

Ok, so how does that make rental prices skyrocket? It seems that we'll be increasing both supply and demand by the same amount.

13   toothfairy   2011 Dec 21, 9:23pm  

This is what Morgan Stanley say rents are going up in the short term but not coming back down.

"Oliver Chang, a Morgan Stanley analyst in San Francisco, expects prices for distressed housing to recover before nondistressed, as more investors buy foreclosures to operate as rentals. He calls 2012 “The Year of the Landlord,” because rents will rise as the homeownership rate continues to fall and non-investors are unwilling or unable to buy."

http://video.cnbc.com/gallery/?video=3000063409

14   mdovell   2011 Dec 21, 10:17pm  

I'm surprised that no one has said but...it just isn't as "big" of a thing to have your own place anymore. Few people live totally alone. It isn't that big of a deal to shack up with someone else. Combine cell phones, wifi..heck even some with zipcar..

Maybe rents will go up but I cannot see them really going down.

Empty houses might not become rentals because someone has to maintain the place. A bank does not want long term costs. If a renter is forced to pay to maintain a place that really does not make sense.

15   Coogan99   2011 Dec 22, 3:16am  

Supply = rental units + owner occupied units. While there is some friction, millions of units can move back and forth between categories. Don't believe me? As condo prices went bonkers, think of all the 'condo conversion' projects we saw. This mechanism prevents rents and home prices from trending independently from one another over meaningful timeframes. Housing starts beat expectations yesterday, so supply remains inflated and growing.

Now lets talk about demand. What determines demand? What determines the total dollars available to be spent on housing (both rental and owned). 1- Number of people, that's obvious, going up, not too fast. 2- Savings and incomes, both of which have been decimated over the past 5 years. 3- Percentage of savings and incomes that people can spend on housing. All of the other rising costs (taxes, health care, education, energy) leave consumers with a smaller percentage available to spend on housing.

Supply: stable and rising
Demand: stressed and falling

We have transitory imbalances (home prices haven't normalized to rents) and government programs (HARP, artificially low rates) which temporarily shift rents/home prices away from their equilibrium. In the end, the number of units and dollars available for housing determine rents and home prices. Home prices must go lower.

16   toothfairy   2012 Jan 6, 3:00am  

propmgrjay says

They'll likely turn into rentals.

not necessarily you've got first time owners coming in who may have been renting an apartment and saving.

So one apartment vacancy opens up but
one displaced homeowner looking to rent something similar to what they had.
Not many people want to go from a house to an apartment so this puts more demand on the market for single family rentals.

17   thomas.wong1986   2012 Jan 6, 2:46pm  

toothfairy says

Why Homeownership Decline Is Only Temporary

Learn to pray...'cause thats all you have.

18   toothfairy   2012 Jan 7, 12:07am  

thomas.wong1986 says

toothfairy says

Why Homeownership Decline Is Only Temporary

Learn to pray...'cause thats all you have.

If anything I'd be praying for fewer homeowners and more renters. Which is likely to happen in the near term. :)

19   futuresmc   2012 Jan 7, 1:13am  

edvard2 says

It could more logically be argued that rents could fall as more people with less than stellar fiances hit the market.

I'm not sure about that. Remember, because of the cultural significants of homeownership in the US and the 'good school' or 'good neighborhood' premium parents shelled out to drive up home prices, people's mortgage payments often exceeded 60% of income. Considering the current average rent doesn't even approach that (the working poor often do this, but not the average which is somewhere in the mid 30's), rents have a long way to go.

The problem is that the poor rent. They don't have the option of home ownership. I personally know alot of people in my neighborhood who pay at least 50% of their income on rent, and they have a roomate besides. If the former home owners drive up rents, those who pull themselves along by their boot straps without the help of government programs, working 60 hours a week to put food on the table, will have alot less food when their lease is next up for renewal. This is why Bernanke's idea to put REO's into rental markets would be a good fit, even if it runs the risk of corporatizing the rental market. It would protect those that do the right thing but aren't rewarded for their labor from facing the indiginity of working multiple jobs only to be homeless when they do get out of work or living the dangerous life of day laborers, seven or eight stranger-roomates to a two bedroom apartment.

20   TPB   2012 Jan 7, 2:07am  

toothfairy says

Once rental prices exceed the cost of owning a home, renters will once again flock back to home ownership, even if loan terms aren’t as favorable as they are today.

I think once it gets to the point where most RE in the country are rental investments, and the landlords are free to gouge the tenants, by oppressive monthly rent hikes. Much like the commodities are being used, as a loss eraser for the financial markets. That will be the way it will be in the country for the rest of our days.

At that point, as I've pointed out before, RE as a Home, will be as cost prohibitive than ever. If you actually want a house to live in, then you'll pay a million for the median price for a non descript crappy 1500 sqft Rancher, in a crappy neighborhood.
Wages will continue to decline, savings and net worth for you average American Citizen will continue to decline, the chances of saving up enough money to buy an investment property, that will still be going for a tenth of what the retail market will be going for. Will be only a dream for most. I mean if you have 100K you could buy a house. But if you want to finance and buy that same house, it will cost over 500K to one Million. Between low incomes and high residential home values, banks wont be lending to homeowners. And with banks also in the Rental market, it would be against their interest to do so.

There is nothing positive that can come out this. Think of wanting to buy a Flat in the heart of Rome, an antient city worth every penny just in the historical value alone. Except it were talking about a house on MLK blvd, Anytown America.

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