Consumer attitudes are changing on the “rent vs. buy” debate. When Mr. Twist and I sold in 2005 and moved into a rental, the usual response when we told friends was “Are you guys doing O.K.?” Now the usual response is “You were so smart to get out when you did.”
My personal experience is not singular. More and more people are swapping their mortgage for a lease agreement: (Thanks to Keith Jurow for forwarding us his latest. Article first appeared on the Real Estate Channel.)
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.”
In spite of renting’s increased popularity, the number of single-family (SF) rentals continues to increase:
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.
Here’s one example from Las Vegas. The Greater Las Vegas Association of Realtors (GLVAR) has only been tracking rentals since 2006. While many rentals are not listed in the MLS, the trend here is clear.
In spite of the fact that the average number of rentals in 2010 has increased 21% from 2006, the number of rentals available at the end of the period has increased by 55% in the same time period.
Occasionally analysts express worry that the number of displaced homeowners from foreclosure will create rental shortages, but it is my belief that in most of these markets, the number of “accidental landlords” (investors who were unable to sell their “flips”) more than compensates for them. For example Jurow quotes the Cromford Report’s claim that there is a shortage of 3-4 bedroom homes available for rent, but a search on Realtor.com for 3 bedrooms + within 20 miles of Phoenix shows 3,216 rentals available.
Jurow concludes “[T]he attractiveness of renting will be a serious impediment to the return of potential buyers to the housing market“. I agree. There are several reasons that, at least in the near term, renting may be more appealing that owning.
1. The risk of losing value. Real estate used to almost always be considered a “safe investment”. However, given the losses already seen in the market and current economic worries, people are hesitant to risk becoming “underwater owners”.
2. The difficulty of obtaining a mortgage. Lending standards have increased to the point that it is now a greater barrier to entry for first-time (and credit battered) buyers.
3. The lack of flexibility. In a world where job loss is a much greater possibility than previous years, many potential buyers are hesitant to commit to the permanency of a mortgage. Even those who are skeptical about values dropping significantly further worry that if they are forced to sell in the next year or two, they will likely be looking at a loss.
The motto used to be “Why throw away money on rent when you can buy?” Now the question often is “Why throw away money on a mortgage when you can rent?”
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twist -
“Housing must be nearing a bottom..”, by Outoffocus, Motley Fool, August 23, 2010.
Congratulations, you’re a leading indicator
But of course that also means all those rosy stories from the MSM should have warned us about the coming crash.
John-
Years ago I bought a stock that had crashed down to 50 cents or so. I thought it was at a bottom and when it came back I’d make a killing. Fortunately I had the sense to know that I was no stock market guru and only bought $100 dollars worth. The company went into bankruptcy a couple of months later and I lost my $100. It taught me that it’s safer to find a “bottom” in the rear view window.
I hope Outoffocuss checks a couple of different metrics before he runs off and buys a house!
twist -
I’m back and online. It will take a while to get used to the new setup.
I find it rather amusing that the same exact words are used in the same exact argument to advance an opposite point of view to what used to be the common wisdom just three year ago: “Why Throw Away Money On A Rent When You Can Buy?” Despite all the housing doom (pun intended
) and gloom, the nature of neither transaction changed since antiquity: at the end of a rent you’re left with zero (at best with a part of your security deposit). At the end of your homeownership (whatever you consider the end of it) you’re left with a property that may not have necessarily appreciated (in either real or absolute money) but in any case it’s a large sum of money (unless your home is in Detroit, MI).
I’m sure it’s different in various parts of the country but here it is actually cheaper (with todays mortgage rates) to pay mortgage and taxes than rent a comparable size home. Makes sense, too: in a rental you still have to pay landlord’s mortgage and his taxes AND his profit above all that.
I agree, home ownership is not an investment per se as in it’s not an activity to engage in to earn profit, but in the end it’s not so bad an investment nevertheless. It provides you with a very essential basic service (shelter) AND it’s safer than to trust your money to Wall Street.
Cheers everyone, keep up good work!
Homeowner-
I agree that there are places where owning is cheaper- but that isn’t always the only consideration. If you aren’t certain you can make a long term commitment, getting out of a mortgage in a slow market is tougher than getting out of a lease.
I was deliberately “punny” on the title. You don’t end up with nothing when you rent. I prefer my nice four bedroom home to living under a bridge. Also, in areas where renting is cheaper than owning, the best way to “build equity” is to put the difference in a savings account and save it for a downpayment in a better market.