The Incredible Shrinking Rental Market

Timothy Birdnow I've worked in the property management field in St. Louis, Mo. for 15 years now, and have seen many ups and downs in real estate. What I have seen in the current market is unlike anything that has come before. The market is strange, to put it mildly. Our inventories are down - way down. People aren't moving much, and buildings that we have always struggled with are filling up and staying full. That would be good news, no? If you were to listen to the media you would come away with the impression that the rental market is booming, and prosperity is just around the corner. If you believe that you would be wrong. First there is this. http://www.linkedin.com/news?actionBar=&articleID=5617442162904936512&ids=djkRej4Pc38Pc30Uc30Ve34SdiMQczgTdjgVe3cTdj8Se3AUcjoRb34UcP8Ve38MczwRcPgNejsNdzkIcP4Scz4MdzkTcPcScPoPe34SdiMOcjkScPAQc3AOdz4Od3gTcjoR&aag=true&freq=weekly&trk=eml-tod2-b-ttl-0&ut=3f6nRWFR1zLBg1 Seems the LA Times is arguing for an improving housing market because there has been a huge drop in the time it takes to sell a house. Good times, right? According to the article: "Housing inventory has sunk to levels not seen since the bubble years. The number of American homes with a "for sale" sign hit 2.5 million in April, the lowest number for an April since 2006, according to the National Assn. of Realtors." End excerpt. But what does that mean? First, the big wave of foreclosures ended with the lawsuits filed against Bank of America and other lenders http://www.bloomberg.com/news/2011-12-01/ma-sues-bofa-citi-jpmorgan-ally-wells-fargo.html, and as a result many of the people who would have been forced to give their homes to the bank (and then those homes would have ended up on the market) got extra time in them. This will end now that the foreclosure rate is ticking back up. http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/money-power-wall-street/home-foreclosure-rates-on-the-rise-again/ (Foreclosures have risen by 9% since April.) Also, it means that many borrowers are under water, owing more than they can sell for, and as a result are forced to put their houses on the rental market, which has been very tight since people who used to own are now forced to rent. Which brings us to exhibit B: http://www.linkedin.com/news?actionBar=&articleID=5618363633756012613&ids=djkRej4Pc38Pc30Uc30Ve34SdiMQczgTdjgVe3cTdj8Se3AUcjoRb34UcP8Ve38MczwRcPgNejsNdzkIcP4Scz4MdzkTcPcScPoPe34SdiMOcjkScPAQc3AOdz4Od3gTcjoR&aag=true&freq=weekly&trk=eml-tod2-b-ttl-1&ut=3c9U-qcjFzLBg1 Rental properties are stuffed fuller than Michael Moore at a Western Sizzler buffet. I can personally vouche for this fact; any decent property has been rented by homeowners in foreclosure, and we have had to loosen our credit requirements because they all are bad thanks to the mortgage market collapse. Single family homes have been renting below market rate for a few years, although that is changing because of the high demand, but we still cannot get past certain ceilings because the renters simply cannot afford high rents. It's very easy to price yourself out of the market these days. So rents are depressed but there are few of them on the market. According to the U.S. Cenus Bureau http://www.census.gov/hhes/www/housing/hvs/historic/files/histtab3.xls, in the first quarteer of 2007 vacancy rates for single family homes were 10.3, that has dropped to 8.2 in the first quarteer of 2012. Duplexes and fourplexes have dropped from 10.2 to 9.3, and multi-families from 10.7 to 9.9 nationwide. I suspect these numbers do not really tell the whole story; properties in depressed areas have lost much more than good units in good locations, and no doubt small town properties are way down. It should be pointed out that vacancy rates rose then dropped, indicating that people lost their ability to pay and were forced out or voluntarily moved in with family. The slight decrease in vacancies since the crisis first hit is no indication of a healthy economy but rather of a kind of surrender by those who had hoped for better. People are renting instead of buying, and downgrading. We have almost no one or two bedroom apartments; people who would rent houses have gobbled them all up, and the houses are being rented by former owners. It should also be pointed out that many properties have been purchased by investors who realize they can rent these properties and when (if) the market improves make a tidy sum. As I said, renters are easy to come by provided you do not overprice the property and are willing to accept people with foreclosures. Which brings us to this Bloomberg story. http://www.linkedin.com/news?actionBar=&articleID=5618900800320319555&ids=djkRej4Pc38Pc30Uc30Ve34SdiMQczgTdjgVe3cTdj8Se3AUcjoRb34UcP8Ve38MczwRcPgNejsNdzkIcP4Scz4MdzkTcPcScPoPe34SdiMOcjkScPAQc3AOdz4Od3gTcjoR&aag=true&freq=weekly&trk=eml-tod2-b-ttl-4&ut=0TLzZ_N2hOLBg1 Yes, home equity is on the rise. Why? The story attributes it to record mortgage rates, but what does that say? Those rates are low because the FED can think of nothing else to do to jumpstart the mortgage industry. Low rates are wonderful for investors and refinancers who have stellar credit, but it places new mortgages - especially for first time buyers without adequate credit or plenty of money to put down - out of reach. Many investors are gobbling up foreclosed or distressed properties, and so the numbers show an uptick, naturally. But is it a sign of returning health to the economy? No. Paying off loans is a sign of economic weakness. People borrow during boom times because they know they can pay back the money. Austerity is a symptom of economic hardship, and the fact that equity is rising suggests that the people who can are trying to pay their mortgages down while they can. Of course, this is money the borrowers won't have for other items, which means they scale back their expenditures, which means that other industries suffer. If someone foregoes a vacation, say, to pay down their mortgage it hurts the travel agents, the airlines, the gasoline industry, the hotels, the restaurants, etc. Yes, the banks get some money back, but due to the interest rate dropping they get less of it, and inflation gobbles up much of it, too. At some point the profit on a dollar drops too low to be worth lending and the banks sink their money into safe and unproductive things. No matter how one looks at it, the housing market is still dead - and the rest of the economy, too. And we are doing the same things today that caused the bubble in the first place. Interest rates are at historic lows to encourage lending. The U.S. Justice Department is still pursuing legal action to force lenders to make loans in high-risk areas, which will force them to make bad loans. Fannie and Freddie are still in-tact and distorting the lending market. The only reforms that have been made are limits to risk management and reductions in profitab‎ility for the lenders. The market cannot heal if the banks aren't allowed to make a profit. So don't expect any improvements in the economy soon.