Consensus erupts over trend toward renting

(Flickr photo by abrin523)

Beware the stampede of opinions about potential homebuyers.  Those views are trampling conventional wisdom by asserting that the American Dream is dead or dying.

Last week, momentum swelled around the idea that many folks are choosing to rent a home rather than buy one.  Such consumers fall into two groups: Those for whom it is their only option because of finances and those who lack enough confidence in real estate to risk a decline in the value of their property.

I don’t know that the herd of economists and analysts wiser than me is wrong, but the volume and consistency of reports about the decline of American Dream was remarkable.

(Most of the links below have appeared or will do so in my Weekly Roundup on Fridays, on the Service You Can Trust Facebook page, on Twitter or some combination.)

Just look at the drumbeat of evidence over the last couple of weeks — for example, what James Bullard, president and CEO of the Federal Reserve Bank of St. Louis observed on Friday:

My sense is that the housing debacle of the past five years may have scared off a generation of potential homeowners. The current cohorts of new homebuyers likely see homeownership as a fundamentally riskier proposition than earlier cohorts, and therefore may be more likely to rent than own.  Such a theory may suggest a more permanent shift to renting.

He was commenting on a paper written by four economists at the U.S. Monetary Policy Forum, according to HousingWire.com and Bloomberg.  He contended that major is under way, reshaping the old story of homeownership as the ultimate American Dream.

On Saturday, the New York Times chimed, noting that rents are rising nationwide and that the apartment vacancy rate is at a low level not seen for more than a decade.

With employment and the economy starting to improve, grown children are moving into rental apartments from shared dwellings even as new residential construction remains constrained, the Times said.  (Although housing starts have surged of late, Paul Diggle an economist at Capital Economics, has said that the annual quantity may not reach the minimum of 1 million for a healthy market before 2015.)

The Times quoted Christopher J. Mayer, a professor of real estate at the Columbia University Business School, as saying this:

We are more of a renter nation than we have been for a while.

Indeed, the homeownership rate has plunged from well over 69 percent to 66 percent, representing some 2 million households.

Eager to capitalize on the trend, investors are scooping up some houses at a deep discount and leasing them to tenants who have lost their own home, the Times reported.  It said:

Several prominent hedge funds and private equity firms have recently announced plans to invest in distressed properties and convert them to rentals. And earlier this month, the government solicited applications from investors interested in buying pools of foreclosed properties held by Fannie Mae, Freddie Mac and the Federal Housing Administration.

Last Wednesday, Reuters seconded the concept, proclaiming in a headline that “The New American Dream is renting to get rich.”

Another booming voice in the chorus recently was economist A. Gary Shilling, who argues that a “33 percent plunge in house prices since 2006″ is favoring renting over homeownership.  “This trend will dominate the housing market for the next four or five years,” he declared.

No wonder that builders are aggressively constructing apartment houses again.

In New York City, it could not have surprised readers of the New York Times to learn that the tight rental market has meant “no ceiling in sight” for the sums that landlords can demand of tenants.

On the other hand — there’s always an other hand, no? — the Mortgage Bankers Association (MBA) sees a silver lining in the rental phenomenon. Its chief economist cites data on rising rents in suggesting that home sales could turn out sunnier than expected this spring.

“This means we might see a spring season better than the numbers are predicting,” Jay Brinkmann said at the MBA’s mortgage servicing conference in Orlando, Fla.

Or we might not.

What got me thinking about writing this post is a recent statement that I read in a third account of the paper that prompted Fed President Bullard to make the boldface comments toward the top of this post.  The four authors were quoted as concluding that there is a “seismic population shift” away from owning to renting. Seismic!

When everyone is galloping along the same path — like the one that led to denial of the housing bubble, until it burst — I tend to get worried.

But if the consensus is correct — and it may well be — such an alarming shift would bode well neither for the housing market nor the economy, which depends on a robust level of home sales for a healthy recovery.

Tomorrow: Out and About

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
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Malcolm@ServiceYouCanTrust.com
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