"The Renting Alternative Will Undermine The Housing Market For Years:"
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.Because so many homeowners who needed to sell could not, since home sales continue to collapse (unexpectedly!), they have placed their homes on the rental market instead of continuing to bleed cash from an empty house. This is, in fact, what I had to do in 2008 after I moved to another city and my house had sat empty for a full year.
Because homes sales are so low and dropping, a perfect storm of price- and rent-depressing pressures is forming:
1. Home prices continue to decline, meaning that people who can buy a house hold off doing so because they are reasonably reluctant to take on large debt to purchase a depreciating asset. Best to wait, they think, for market bottom than take a chance of buying now and being upside down on loan-to-value as prices keep falling.
2. Mortgage interest rates are lower than they have ever been in real terms, but this boon comes with two clouds around its silver lining. One, it's harder to qualify for a mortgage than before. A mortgage broker recently told me that absent some statutory programs such as VA loan guarantee, if a borrower does not have at least 20 percent to put down and and very good credit score, he simply is not going to write the mortgage, period. The days of easy mortgages are gone for good.
Second, very low interest rates mean that the tax breaks of home ownership are minimized. Interest charged is deductible from pretax income on the IRS Form 1040, but the lower the rate the lower the interest part of the payment. This amounts to a sort of de-subsidy of home buying and if "that which is subsidized increases," then that which is de-subsidized decreases.
3. Economic uncertainty and corresponding lack of job security mean that people who are otherwise motivated to buy refrain. Consider a "roughly 30 year old editor" and her husband when they moved from Boston to Philadelphia. "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."4. Contrary to conventional wisdom, it is not the low-income people who are mostly defaulting and losing homes to foreclosure. Upper-middle and high-income earners are more likely because they tended to reach for more expensive homes than they thought they could afford over the long term, basing the decision on the expectation that their incomes and home values would grow enough, and quickly enough, to avoid insolvency. They were the most likely to accept "creative financing" or high loan-to-value mortgages and are hence the most likely to find themselves upside down.
That means that an awful lot of the houses now on the rental market are much nicer homes, and in more desirable locations, than before, thus making renting more attractive for increasing numbers of people.
Will the housing market recover to its 2005 level? Well, not in my lifetime.
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