Saturday, October 12, 2013

7 reasons rentals rocking housing market

Buying a home is 35 percent cheaper than renting in the long term. Still, an increasing percentage of Americans are choosing to sign a lease rather than a deed. 
By Beth Braverman, The Fiscal Times | October 12, 20136
Next stop: Maybe not home ownership.
Next stop: Maybe not home ownership. (Courtesy Shutterstock)
 


Home sales have finally begun to slow after a red-hot summer that saw prices soaring so quickly that some began to worry about the return of a housing bubble. But despite the recent housing gains, the country's home ownership rate has continued to fall. Just 65 percent of households in the first half of this year owned their homes, the lowest level in 18 years, and a significant decline from the record high rate of more than 69 percent reached at the height of the housing boom in 2004. Even though buying a home is 35 percent cheaper than renting in the long term, an increasing percentage of Americans are choosing to sign a lease rather than a deed. Experts predict home ownership will fall even further in the next few years. "We could see levels we haven't seen since the 1960s," says Patrick Newport.  Although home ownership rates are likely to rebound a few years from now, the gains will be slow, and housing economists don't see them ever again reaching the unhealthy "bubble" levels hit in the early 2000s.
Here's why:

1. There's a lingering impact from the foreclosure crisis
Foreclosure activity peaked in 2010, and August foreclosure starts were at the lowest level since December 2005. Just because the worst of the foreclosure crisis that led to the housing bust is behind us, it's not so far in the rear view that it's no longer impacting the market. Many of those who have lost a home to foreclosure have no desire to be a home owner again; but even those who do will have to wait years before they can purchase another property. Foreclosures remain on a credit report for seven years, which can make it extremely difficult for those consumers who have been through one to get favorable terms on another mortgage.

2. Lending conditions remain tight
Potential buyers without a foreclosure on their credit report are finding it tough to get a mortgage. Even with a down payment of 15 percent to 25 percent, nearly a third of Americans will not qualify for a mortgage under today's lending standards, according to a study by Zillow.

3. Investors have reshaped the market
Cash-rich institutional investors jumped into the market when homes were at their cheapest and built up massive real estate holdings that they've since turned into rental properties. In addition, many people who were underwater on their homes but needed to move became "accidental landlords" renting out their first home so that they could move to a second. The result: Four million more single-family homes are available for rent than there were prior to the recession, meaning potential renters have far more options.

4. Boomerang kids are going to rent first
Thanks to high unemployment rates and heavy student debt loads, an increasing number of millennials have moved back into their parents' homes after college. Last year, 36 percent of the country's 18- to 36-year olds lived with their parents — the highest share in at least 40 years, according to a Pew Research study released in August. Experts believe those millennials will eventually move out, but they're not going to jump straight from mom and dad's couch into home ownership. "Those young people are probably going to rent before they buy," says Jed Kolko, a housing economist with Trulia. That could push the home ownership rate down even further.

5. Fewer people are married with children
Just 21 percent of current households are married with children, a decline from 24 percent in 2000. Meanwhile, the number of single households has reached 27 percent, more than double the percentage of a few decades ago, according to the Census Bureau. "There's less of a need now for people to stay put and buy a house with space for all their kids," says Jim Lapides, a spokesman for the National Multi-Housing Council. "They're more interested in living close to work and being able to walk places."

6. Potential buyers are worried about mortgage rates
Nearly two-thirds of potential buyers told real estate brokerage Redfin that rising mortgage rates have negatively impacted their ability to buy a home. A fifth of buyers said they had slowed the pace of their home search in response to rising rates. Currently mortgage rates are about 4.5 percent, but the Mortgage Bankers Association predicts they'll reach 4.9 percent by next year.

7. Buying isn't the "American Dream" anymore
The American Dream used to be synonymous in the American psyche with home ownership. Not so anymore. Today, the most popular definition of the American Dream is retiring with financial security, followed by being debt-free, according released in September by Credit.com. Just 18 percent said that buying a home was the American dream.