Will Growing Rental Trends Undermine U.S. Home Sales?

Will Growing Rental Trends Undermine U.S. Home Sales?

Residential News » Residential Real Estate Edition | By Keith Jurow | August 23, 2010 8:00 AM ET

There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008.  Especially sobering was the fact that 78% of those surveyed were homeowners.

David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers.  In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home."

Given this introduction, let's take an in-depth look at whether there is a movement away from the idea of homeownership as a worthwhile goal and toward the benefit of renting.

End of the Housing Bubble Led to a Surge in Houses Available to Rent

As early as the summer of 2005, the slowdown in speculative buying in the hottest metros caused a flood of investor-owned homes to hit the rental market.  In August 2005, an article in the Wall Street Journal entitled "Speculators Push Rents Down" pointed out that the supply of rental homes in the Phoenix area almost doubled from a year earlier.  Average rents for these houses dropped by nearly 10%.  Similar situations were found in markets as diverse as Fairfield County in Connecticut, Kansas City, Las Vegas, San Diego and Palm Coast, Florida.

Even more ominous was the fact that 1.34 million single-family home rentals stood vacant.  This had risen from only 900,000 in 2003 according to Harvard University's Joint Center for Housing Studies.  Many of these homes became rentals because the investor was unable to flip the property.  By the end of 2006, the number of vacant homes for sale had skyrocketed to 2.1 million according to the Census Bureau.    

As I pointed out in a previous REAL ESTATE CHANNEL article, the glut of rental homes in bubble markets such as Phoenix had caused rents to plunge to half the cost of owning that same home by the beginning of 2008.  The press began to notice that the soaring number of homes and condos for rent was providing an attractive alternative to buying. 

A June 2008 Associated Press article posted in the Los Angeles Times emphasized that these rental properties were attracting "displaced homeowners" who preferred them to an apartment.  As foreclosures soared, these displaced homeowners continued to opt for rental homes.  A January 2010 article about the Denver rental market posted by Inside Real Estate News pointed out that "if a family loses their home in a foreclosure, instead of leasing an apartment in a building they will rent another home."  What happens after a single-family foreclosure is that "the family moves into a rental house down the street."  The author noted the irony in the fact that the home they are moving into may also be a foreclosure that had been bought by an investor.

2010 - Homes for Rent Continue to Increase and Rents Continue to Weaken

With the collapse in Florida home prices over the past three years, you would think that house rents might have begun to firm.  No way.  An article published in January 2010 in the online Herald Tribune painted a dismal picture of the rental market.  One landlord who owns more than 150 single-family homes lamented that "There isn't the demand that there was a few years ago because we've lost our construction workers ... We certainly have a lot of empty units."

Another owner of ten rental homes stated that she and other landlords had had to reduce rents by "at least a third."  A house that commanded a rent of $900 a few years ago gets only $500 now.  There are simply not enough potential renters who can afford even these slashed rents.  Because many of these smaller professional landlords are also faced with rising vacancies, a growing number of them are seeing their properties fall into foreclosure.

A month later, an article appeared on which reviewed the house rental market around the country.  The picture was nearly as grim.  In Brooklyn, New York, whose market has held up better than most, rents have slipped by roughly 20% since early 2009.  A similar percentage drop was seen in the California communities of Venice and Santa Monica. 

The owner of a property management firm in St. George, Utah stated that home rental vacancies were the highest he had seen in the last thirty years.  Another property management owner in Portland, Oregon bemoaned the fact that frustrated sellers have been throwing their properties onto the rental market, adding to the glut.  The same thing was happening in the California Inland Empire city of Temecula.  One close observer of that market noted that the asking rent for single-family homes had slipped below apartment rents which was almost unthinkable only a year or two earlier.

More recently, the May 2010 Las Vegas Rental Home Market Report stated that median house rents were down nearly 10% from a year earlier even though leasing volume was up by 20%.

Those Who Can Afford to Buy Are Extremely Reluctant to Do So

While surveys and statistics can be very revealing about the housing market, you cannot really get a good sense of the changing mindset of Americans from them.  To do that, you need to spend time reading comments written on some of the housing blogs and in response to online articles.

Let's start with a blog called Metropolis which covers the Philadelphia region.  A mid-July posting by the roughly 30 year old editor discussed the question faced by her and her husband since they moved from Boston.  Clearly, they had the combined income to afford to purchase in the pricy Center City.

Yet they decided to rent even though rents were high.  As she explained the decision, "Part of the appeal of being young, urban and childless is the freedom to travel frequently, relocate on a whim, and throw all of our disposable income at shiny new consumables."  She went on to ask, "Do I want the responsibility of owning a home?  Not in the slightest."  Though she admitted that she and her husband might purchase a property, she ended the article by declaring that "Until then, I'll be proudly writing my monthly rent checks."

One of the commenters on the article advised the author that there were plenty of affordable nice rentals with great amenities outside of Center City.  Another commenter with a new baby felt the pressure from everyone to buy a property in the suburbs.  But that was not what they wanted.  As she put it: "We're moving this fall from one rental to another, and I like the feeling of having something new.  With a pool I don't pay for, a gym that's open 24 hours a day, and emergency plumbers on staff at 2 a.m., I have enough responsibility in my life that I don't need a home."  She closed by declaring that "my rent payment gets me ... the amenities I've grown accustomed to ... and the peace of mind that someone else is responsible for maintenance."

Another blog raised the question of whether it made more sense to rent or buy.  A Chicago commenter said unequivocally that "I think we might be renters forever.  My husband and I love sitting ... in the park reading the Sunday New York Times while our landlord is stuck fixing the garbage disposal.  Time is priceless.  And we are nowhere nearly as freaked out about finances as our friends are."

Another commenter explained unequivocally that "Renting is a service I gladly pay for. We spend about $40 a day for use of a nice three-bedroom townhouse on a quiet street, with a private yard, a larger park for kids in the complex ... I like having money set aside for a surprise like a weekend trip to Manhattan or a night at the Opera instead of a blown water heater or a leaky roof."

Finally, an article on the online Wall Street Journal in early August discussed the glut of homes for sale.  One commenter proudly boasted that "I sold my home four years ago in south Orange County [CA] and have been biding my time as the market props run their course."

Another commenter declared that "[I] have close to 200k household income, 100k down payment waiting in the bank, but any home I'm interested in is close to a million or more.  Sure, I could afford a condo or home in less desirable areas, but I prefer to live near my socio-economic peers.  I don't understand how families can afford to buy 700-800k homes on 70k household incomes.  Until things make sense, I'm not buying.  I'm happy to continue renting in a nice neighborhood close to work, and use the left over cash to feed my nest egg."

The Caretaker Alternative

For those of you who may be reluctant to buy but are hesitant to sign a lease of one year or longer, an alternative known as a caretaker could be worth looking into.  To deal with the growing number of vacant, habitable homes which the owner would eventually like to sell, an industry known as home tending has blossomed in the last fifteen years.

The concept is a simple one.  Vacant homes often attract vandals, thieves, drug dealers and even squatters.  Home tending companies provide clients such as individual owners, real estate agents, builders with vacant homes built on spec, remodelers fixing up a property to flip, and occasionally banks with a carefully screened live-in caretaker.

The home tender firm does not charge the client anything.  How do they make money?  Caretakers gladly pay a reasonable fee to live in a very nice home with their own furniture.  According to one home tending company owner in San Antonio, the caretaker may pay about $750 a month to occupy and care for a house worth $400,000.

The monthly payment is not rent according to a company owner in the Phoenix area.  As she explains it, the caretaker is a subcontractor of her firm who understands that there is no fixed time commitment for staying in the house.

The caretaker is responsible for keeping the house clean and maintained and the yard mowed and manicured so it can be shown to a prospective buyer at a moment's notice.  The Phoenix firm does a background check and requires caretakers to complete their training program.  The caretaker must also carry a minimum of $300,000 in liability insurance and $25,000 personal property insurance. 

When the house is sold, the caretaker is usually given 10-14 days to vacate.  One of the largest firms, located in Utah, will sometimes shift a caretaker to another property when the one they have been occupying is sold.

Who are these caretakers?  Many of them are professionals who are relocating and either need a temporary place to reside or want to learn more about an area before deciding where to live more permanently.  They also include former homeowners who have lost their property to foreclosure and need a place to live until they can get back on their feet.  Some are divorced men or women in transition and looking to start a new phase in their lives.  Others are renters trying to save enough money for a down payment on a house they hope to buy in the future.

Why Renting Will Be a Popular Alternative to Buying for Years

Some housing analysts argue that the American dream of home ownership is still alive and well and will reassert itself when the economy and housing markets recover.  This is little more than wishful thinking.

The housing bubble of 2004-2006 was the climax of a powerful belief which had formed over decades that residential property prices always go up.  The collapse in home prices around the country since late 2006 has shattered this assumption.  Zillow's latest Homeowner Confidence Survey for this year's second quarter reported that one-third of all homeowners do not believe that home prices have reached a bottom.

The change in attitude toward owning a home cited in the beginning of this article has now reached the blogosphere.  A Google search I ran on renting vs. buying found a website which posted links to 48 blogs that touted renting as the preferable option.  How many of them were there during the peak bubble years?

The attraction of renting now is boosted by the growing vacancy rate for both houses and apartments.  The following chart posted recently by the Calculated Risk blog shows the long-term upward trend. 

With nationwide vacancy rates now well over 10%, it is extremely difficult for a landlord to even consider raising rents.  Since roughly 25% of all home sales are currently going to investors paying cash, large numbers of homes will continue to be thrown onto the rental market.

The one major market where there is apparently a shortage of nice 3-4 bedroom rental homes is Phoenix according to the Cromford Report.  If this claim is accurate, it is due to thousands of former homeowners who have lost their house to either foreclosure or a short sale and are looking for an attractive home to rent.  The supply is down because, as I have reported in a previous article, banks are withholding most repossessed homes from the market.

For all the reasons discussed in this article, the attractiveness of renting will be a serious impediment to the return of potential buyers to the housing market.  The change in consumer attitude is well summed up in this March 2010 post on a Zillow advice thread:

"We cannot wait to rent and walk away from this upside down/underwater bad investment.  And while we go through the process (foreclosure) 6 to 8 months, we will be socking away the $2600+ mortgage payments preparing for our rental.  Even $1500.00 for the rental of a home as nice or even nicer is $1100.00 per month ahead. Just think, no property taxes, no HOA dues and when something goes wrong, call the landlord.  We can handle the credit hit.  Currently we have about 840 FICO.  The way things are going we will be able to save enough cash to just buy a house in a few years." 

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