Report: Single-Family Rental Demand Is Outstripping Supply

By Nick Timiraos For WSJ.com November 13, 2012, 8:00 AM

 

Demand for single-family rental housing is outstripping the available supply of homes, and some housing markets that have been hit hardest by the foreclosure crisis have seen rental demand jump by more than 25% in the past year, according to a report to be released Tuesday by real-estate firm CoreLogic CLGX -2.06%.

It shouldn’t be surprising that single family rental demand has picked up in recent years: There are many families who have lost their homes to foreclosure or that can’t qualify for mortgages given tighter underwriting standards.

But the magnitude of rental-demand gains is still eye-opening. Markets that include Port St. Lucie, Fla.; Riverside, Calif.; and Tucson, Ariz., have all seen rental demand jump by 25% over the past year, and 22 of 30 markets tracked by CoreLogic have seen year-over-year leasing gains.

The single-family rental market has attracted a glut of institutional investor capital over the past two years, as firms to seek to build scattered-site property management infrastructure for an asset class that has long been the domain of mom-and-pop owners and smaller investors.

Slightly more than half of all rental units in the U.S., or around 21 million units, are single-family homes. Around four in five of those unit owners are individual investors.

Investor demand for rentals shows little signs of weakening, according to the CoreLogic report. Leasing activity was up 7% from one year ago in August and up 12% from the beginning of this year, even though the inventory of homes for rent is down by 11% from one year ago.

As a result, it would take just 2.6 months to rent the available stock of for-lease homes in August, down from 3.2 months of supply last year and over 5 months in 2007. It took just six weeks for a listing to be rented, which was unchanged from one year ago but down from more than eight weeks in 2009.

Single-family rents, which tend to show less volatility in either direction than home prices, rose by 2% last year and have increased by 1% so far this year, after declining in 2009 and 2010. “While those increases are low, rent growth typically lags home price growth by about 12 months,” writes Sam Khater, senior economist at CoreLogic, in the report. He expects rent growth to increase “at a strong clip” late this year and throughout 2013, though not at the same rate as home prices.

The largest rent increases were found in North Port, Fla.; Cape Coral, Fla.; and Honolulu, where rents increased by more than 6%. But rents also rose in cities such as Houston and Raleigh, N.C., where the economy has fared better and the housing market wasn’t as hard hit by the bust. Large rental increases beyond the housing-bust markets “is indicative of the rising tide of demand for single-family rentals,” wrote Mr. Khater.

Original Post: http://blogs.wsj.com/developments/2012/11/13/report-single-family-rental-demand-is-outstripping-supply/

Renting Prosperity

Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move—and how it will lead to the next boom.

By DANIEL GROSS May 4, 2012, 6:08 p.m. ET for WSJ.com

Photo illustration by The Wall Street Journal

 

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed.

"The Great Gatsby," the pre-eminent American novel of financial ambition, overextension and downfall, offers a revealing vignette about the great American obsession: real estate. The narrator, Nick Carraway, can't afford to buy in the rarefied Long Island world inhabited by Gatsby, and by Tom and Daisy Buchanan. But he can afford to rent. "When a young man at the office suggested that we take a house together in a commuting town, it sounded like a great idea. He found the house, a weather-beaten cardboard bungalow at eighty a month, but at the last minute the firm ordered him to Washington, and I went out to the country alone," he notes. "I had a view of the water, a partial view of my neighbor's lawn, and the consoling proximity of millionaires—all for eighty dollars a month."

 

 

The economy needs the dynamism that renting enables as much as—if not more than—the stability that ownership engenders.

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.

 

 

While downgrading the place of ownership in the American psyche may sound like a traumatic task, the cold, unsentimental fact about the American dream is that Americans never really owned it in the first place. For the past three decades, especially, consumers haven't so much bought their quality of life as they've borrowed it from banks and credit card companies. And since the Great Recession, Americans have been busy rebuilding their balance sheets and avoiding new financial encumbrances. When American consumers can't—or won't—borrow to purchase the goods and services they've come to consider part of their standard of living, how does the economy get back on its feet?

The answer lies in consumers following the example of corporations—that is, becoming more efficient. The reaction to extended leverage and foolish borrowing isn't to stop consuming and buying; it is to consume and buy more intelligently. That's what the Rentership Society is all about. And it starts at home. Literally. Housing is the biggest single component of consumption in the U.S. economy and the source of much of our present misery. According to the Bureau of Labor Statistics, the typical consumer spends about 32% of his or her budget on shelter. In the last decade, that generally meant borrowing a lot of money to take "ownership" of a home.

The vast mortgage-political-financial complex, for a variety of reasons, valued homeownership as a good in its own right. Democrats saw the extension of credit to people on the lower end of the income scale as a matter of social justice; Republicans thought homeownership would make people more bourgeois. Banks and Wall Street firms salivated at the fees mortgages could generate.

So, during the boom, the homeownership rate grew steadily, peaking at a record 69% in 2006, according to the Census Bureau. But those gains were short-lived and came at a truly massive cost: a huge mortgage bust, expensive bailouts of Fannie Mae and Freddie Mac, an overhang of millions of foreclosed properties and falling home prices. Ownership-boosters failed to note that homes purchased in 2005 and 2006 with no-money-down, interest-only mortgages weren't really bought. They were simply rented until the "owner" flipped them or walked away from the mortgage. Far from strengthening low-income neighborhoods, this destabilized them through the inevitability of foreclosure.

In the post-bust climate, renting has emerged as a much more economically efficient way to pay for housing. A one-year lease represents a far less onerous financial obligation than a 30-year mortgage. It's difficult to get into too much financial trouble as a renter. The homeownership rate has fallen from its peak in 2006 to 65.4% today. The foreclosure crisis, which has caused millions of Americans to turn over homes to lenders, is responsible for much of this decline. What's more, given the weak labor market and higher lending standards, more Americans today have a difficult time scraping together the required down payments.

For an increasing number of Americans, though, it simply makes more sense to rent these days. According to Moody's, by late 2011 it was cheaper to rent than to own in 72% of American metropolitan areas, up from 54% a decade ago. And the more people who do it, the more socially acceptable and desirable it becomes. The decline in the ownership rate means that about three million more households rent today than did at the height of the bubble.

It's tempting to view the rise of rentership as an economic step backward. Renters can't build up equity, and they have less control over their living standards than owners. Renting is generally seen as something you do when you've failed as a homeowner or are not yet ready to be one. But I'd argue the rise of rentership is a sign of a system adapting—albeit too slowly—to new realities.

Alamy

 

Renting has emerged as a much more economically efficient way to pay for housing, argues Daniel Gross.

The U.S. economy needs the dynamism that renting enables as much as—if not more than—it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can't easily take his skills to where they are needed in North Dakota or Wyoming if he's underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership.

Home builders and property owners have caught on to the economic opportunity presented by the move toward rental. Fannie Mae and Freddie Mac have become reluctant owners of more than 200,000 properties thanks to the foreclosure crisis, working through the backlog, one painstaking foreclosure sale at a time. But in February, Fannie Mae said it would put up for sale some 2,490 homes as a package, asking for $321 million. The Wall Street Journal reported that an assortment of real estate companies and private-equity investors were considering making bids. The presumption was that these sophisticated investors would turn the homes into rental properties. No less a sage than Warren Buffett told CNBC in February that he'd love to buy "a couple hundred thousand" single-family homes for rentals.

The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%.

What's more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market.

And the rising popularity of rentership is hardly contained to the housing market. Indeed, it has spurred the creation and growth of innovative businesses in a number of other realms—particularly those that cater to America's cash-strapped, credit-wary youth.

Take cars. The Bureau of Labor Statistics says that private transportation—owning and running a car—is the second largest cost for a typical American household, accounting for 16% of expenditures. Factoring in finance costs, depreciation, repairs, insurance, taxes and gas, AAA calculates that an owner of a midsize sedan who drives 15,000 miles a year spends $8,588 a year on his car.

Enter auto-sharing firm Zipcar. Founded in 2000, it grew by focusing on cities and college campuses. It uses information technology to manage its fleet, and control access—people get cards that let them into garages where cars are kept and into the cars themselves. Users in New York pay a $60 annual fee and then $8.75 per hour on weekdays and $13.75 per hour on weekends—no extra charge for gas or insurance or miles. As the U.S. economy contracted, Zipcar went into hyper-growth: from 225,000 members in 2008 to 650,000 members and 9,500 cars in November 2011. Zipcar, which went public in 2011, has had success in the predictable big cities like Boston, New York and San Francisco, but its vehicles can also be found on 350 college campuses and in smaller cities like Providence, R.I., and Portland, Ore. Large rental agencies like Enterprise and Avis have responded by rolling out similar services.

Or take textbooks. College textbooks are, in effect, rental goods. Students buy them at retail, use them for four months, and then resell them to the campus store or a used-book dealer. In 2010, the U.S. college-textbook market was worth about $4.5 billion, according to the American Association of Publishers. But why buy textbooks when you can spend less and rent them? Chegg.com, founded in 2001, has raised more than $200 million in funding and is aiming to displace the college bookstore. An undergrad can buy an economics textbook new for, say, $263. At Chegg.com, she can rent a hard copy of the same book for $94 for 180 days, or an electronic copy for $128 for the same period. As more students come to campus with Kindles, Nooks and other e-readers, the more efficient consumption of college textbooks is likely to grow rapidly.

Rent the Runway, another Rentership Society business, has likewise found a foothold on college campuses. The company was started in 2009 by Harvard Business School classmates Jennifer Hyman and Jennifer Fleiss. Ms. Hyman has called the company "the Netflix for fashion." As with Netflix, customers open accounts and then pay for the temporary use of goods sent to them through the mail. A Thread Social Poppy Sweetheart Dress (retail price: $365) rents for $50. Accessorize with Crislu Crystal Tear Earrings (retail $96, rent for $20). In business for less than two years, Rent the Runway has raised $31 million in venture capital, attracted one million customers and is turning a profit.

All these models involve more sharing than American consumers are typically accustomed to doing. But the culture is changing. Consider how quickly the attitude of consumers toward housing has changed. And I'm not just talking about the rising incidence, popularity and acceptance of home and apartment rental. At the height of the boom, people believed their homes generated cash by serving as a source of home equity credit, or by returning profits when they were sold. Today, not so much.

But thanks to another postrecession business, efficiency-seeking homeowners have come to realize that their homes can still generate cash. Airbnb, founded in August 2008, is dedicated to the promise that lots of people are willing to earn money by renting out a room in their home and that lots of people are willing to save money by crashing in strangers' abodes rather than in motels or hotels.

Only in America could entrepreneurs rapidly transform couch-surfing into a high-tech business worth more than $1 billion in the space of 36 months. With over 100,000 listings available in more than 16,000 cities and 186 countries, it's a real business. It has booked over 5 million nights. In July 2011, Airbnb raised $112 million from venture-capital firms Andreessen Horowitz, DST Global and General Catalyst. But the real value of Airbnb isn't necessarily what profits it brings to investors. Rather, it's the cash it puts into the hands of homeowners. That cash is not enough to turn around the economy. But it's part of a sea change in how people view the true value of their property and how they role of ownership in their lives as a whole.

Finally, perhaps, Americans are absorbing a piece of wisdom not from Gatsby, but from Thoreau: "And when the farmer has got his house, he may not be the richer but the poorer for it, and it be the house that has got him."

—Mr. Gross is economics editor at Yahoo Finance. This essay is adapted from his new book, "Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy," which will be published Tuesday by the Free Press.

A version of this article appeared May 5, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Renting Prosperity.

Original Post: http://online.wsj.com/article/SB10001424052702304746604577382321021920372.html?mod=WSJ_RealEstate_RIGHTTopCarousel

Housing regulator argues for debt forgiveness

By Robin Harding and Shahien Nasiripour in Washington

It may be cheaper for state-controlled lenders Fannie Mae and Freddie Mac to forgive some distressed mortgage debt than to postpone payments, their regulator said for the first time on Tuesday, in an important shift that could boost the struggling US housing market.
Edward DeMarco, the head of the Federal Housing Finance agency, said a ”preliminary” analysis showed that Fannie and Freddie might save $1.7bn by forgiving some principal rather than just postponing payments because of increased incentives from the US Treasury and the greater likelihood that such borrowers would repay.

“The anticipated benefit of principal forgiveness is that, by reducing foreclosures relative to other modification types, enterprise losses would be lowered and house prices would stabilise faster, thereby producing broader benefits to all market participants,” said Mr DeMarco.

About 12m borrowers, or one in five US homeowners with a mortgage, owe more than their property is worth, creating a huge drag on the housing market and the economic recovery. Fannie and Freddie own or guarantee roughly half of all outstanding home loans.

Mr DeMarco has fiercely resisted measures that would increase Fannie and Freddie’s losses for the sake of the wider economy, but his comments suggest a campaign by the Obama administration may have persuaded him that principal writedowns are now in the the agencies’ best interests.

His remarks came as the International Monetary Fund argued that the US could boost its economic recovery by writing off household debt more aggressively. In a chapter of its new World Economic Outlook the IMF said cutting household debts is a low cost way to limit the economic damage of a recession after a financial crisis.

“The need to really do something about this is still there more than three years after some of the flagship debt restructuring programmes were put in place [in the US],” said Daniel Leigh, the lead author of the IMF work.

The IMF highlighted two case studies – the US in 1933 and Iceland in the last couple of years – as successful examples of household debt restructuring.

In the wake of the Great Depression, President Franklin Roosevelt set up the Home Owners’ Loan Corporation, which bought and restructured one in five of all US mortgages and was wound up at a profit in 1951.

In Iceland, banks were persuaded to cut mortgages to 110 per cent of the value of a debtor’s assets and payments were reduced to reflect households’ ability to pay, spurring a recovery after a disastrous financial crisis.

Mr Leigh pointed to three flaws in the home affordable modification programme, or HAMP, the flagship US effort to write down the value of mortgages that are now worth more than the home they are secured on.

First, the programme didn’t provide large enough writedowns, so the remaining debts were still large and households defaulted anyway; second, lenders were not given enough incentives for writedowns; and third, the eligibility requirements were tight, so not many households were able to take part.
Mr Leigh welcomed the administration’s recent moves to boost writedowns and said it was important that Fannie and Freddie joined in. But Mr DeMarco noted the likelihood that some borrowers current on their payments may default to take advantage of a debt forgiveness programme and the cost of implementing such an initiative.

To avoid such “moral hazard” – the problem of households deliberately choosing to default in order to get their debts written down – the IMF said restructuring programmes should be limited to mortgages that are already in trouble on the date that relief is announced.

Under Mr DeMarco’s analysis, US taxpayers would pay Fannie and Freddie $3.8bn in leftover bailout funds from the troubled asset relief programme to write down mortgage principal, which after accounting for the $1.7bn in savings would result in a net cost to taxpayers of $2.1bn.

While a forgiveness programme would be cheaper than allowing borrowers to delay paying a portion of their property debt, an initiative targeting 691,000 borrowers still meant overall losses of roughly $54bn, according to Mr DeMarco. However, that cost does not take into account the economic benefits conferred by averted foreclosures.

“This is not about some huge difference-making programme that will rescue the housing market,” Mr DeMarco said. He will make a final decision later this month.

Original Post: http://www.ft.com/intl/cms/s/0/289c1214-8318-11e1-929f-00144feab49a.html#axzz1rkO4Z7F2

It's Time to Buy That House

By JACK HOUGH
U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

The good news? Two key measures now suggest it's an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation's ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter "throws money down the drain." Whether buying is a better deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors.

But the math is turning in buyers' favor. Stock-oriented folks can think of a house's price/rent ratio as akin to a stock's price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody's Analytics. The average from 1989 to 2003 was about 10, so valuations aren't quite back to normal.

But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points.") The latest rate is still less than half the average since 1971.

As a result, house payments are more affordable than they have been in decades. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index's historic average is roughly 120. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. So today's buyers can afford handsome houses—but prudent ones might opt for moderate houses with skimpy payments.

For example, the median home in the greater Phoenix market, including houses, condos and co-ops, costs $121,700, according to Zillow.com. With a 20% down payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com.

Of course, all of this assumes mortgages are available—no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. "If you have good credit, a job and a down payment, you can get a mortgage," Mr. Humphries says. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s."

Not all housing markets are bargains. Mr. Humphries says Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price/rent ratio, resulting in a rent "yield." The median market's rent yield is 9.3% and Detroit's is 17.9%.

Investors would then subtract for taxes, insurance, upkeep and other expenses—costs that vary widely. But suppose total costs were 4% of the purchase price. That would still leave a 5.3% rent yield in the typical market. With the 10-year Treasury yield at 2.2% and the Standard & Poor's 500-stock index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive.

A few caveats are in order. First, not all transactions are average ones. Even in low-priced markets, buyers should shop carefully. Second, prices could fall further. Celia Chen, a senior director at Moody's Analytics, expects prices to drop 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," Ms. Chen says.

And property "flipping" can be dangerous even when prices are rising. That is because, absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods.

Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and plump investment yields are scarce, buyers should jump.
—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

Renting: The New American Dream