Potential homebuyers can’t save for down payments with high rents

Renters forced to pay higher rents don’t have the income left over to save for a down payment; thus housing suffers.

biggest_saverWhen bankers examined the common characteristics of borrowers who defaulted on their loans during the housing bust, they noticed that down payment was strongly correlated to default rates. In fact, as the down payment approached zero, default rates rose exponentially. The highest default rates were among homebuilders who depended on zero down buyers often getting a down payment from a charity funded by the homebuilder. This prompted the FHA and the GSEs to ban down payment assistance from third parties other than immediate family.

Lenders, homebuilders, and realtors lobbied to eliminate a down payment requirement from the qualified mortgage rules, and they succeeded. VA loans don’t need a down payment, and occasionally rent-to-own programs pop up that allow buyers a path to ownership without a down payment, so while down payments are not a necessity, the FHA and the GSEs won’t buy loans with no money down, so lenders don’t originate those loans — at least not at this point in the cycle.

Without zero down loan programs, buyers must save for a down payment.

Saving for a down payment is hard. During the housing bubble, people had access to 100% financing, so many buyers didn’t save for a down payment. After the housing bubble, the Great Recession caused many people to dip into savings just to make ends meet. jesus_Bernanke_savesFurther, since the federal reserve lowered interest rates to zero, beyond the emotional need for reserves for stress reduction, people had little or no incentive to save.

The end result of these circumstances is that very few potential homebuyers have the necessary down payment, even the paltry 3.5% required by the FHA. And since renters put a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. There is no magic bullet or simple solution to this problem.

Perhaps it’s “old school” and unfashionable in our modern era of unlimited entitlement, but the only way to save for a down payment is for potential homebuyers to sacrifice current consumption and adjust their finances to live within the constraints of their income. Unfortunately, sacrifice is no longer the American Way.renting_is_better

Renters, get out your checkbooks, hikes are coming

Leslie Shaffer, Wednesday, 7 Oct 2015

Property managers in the U.S. are raising rents – possibly by as much as 8 percent next year – as demand rises and vacancies fall, a new survey from property rental website Rent.com found.

Ordinarily, an 8% rent increase would be an unrealistic exaggeration, but Los Angeles County rents are rising at 7% annual rate, so 8% is entirely possible, particularly if the economy heats up.

“An overwhelming 88 percent of property managers raised their rent in the last 12 months, and there does not appear to be any signs of stopping,” the survey of more than 500 U.S. property managers who used Rent.com found.

The one disappointment I’ve had managing rentals in Las Vegas has been the inability to raise rents over the last few years. Much of that is due to the continued influx of rental supply, and over the last 18 months, I haven’t had any turnover, so opportunity to raise rents has been limited. I have noticed a significant improvement in vacancy, and renters don’t want to leave.lowly_renter

Of the property managers surveyed, 68 percent estimated rents would rise next year, with an average forecast of 8 percent next year, up from the 6 percent increase forecast in 2014 . The median asking rent in the U.S. rose by 6.2 percent from $756 a month in the second quarter of 2014 to $803 in the second quarter of this year, data from the U.S. Census Bureau show.

The primary reasons cited for the latest rises were increasing demand and low inventory. Vacancy rates for rental housing nationally dropped to a 20-year low of 6.8 percent in the second quarter, down from 7.5 percent in the year-earlier period, census data show.

This was easy to foresee. Last June I wrote that Single-family home rents will soon begin to rise. One of the big stories of 2014 was the sudden and dramatic decline in investor sales because prices were pushed too high to meet their return requirements. The decrease in investor purchases also meant the flood of single-family rental supply abruptly stopped, and as the existing inventory was absorbed, the rental market tightened, and single-family home rents rose.

At the same time, demand is increasing – 45 percent of managers said they saw more Millennials coming into their offices as prospective tenants, and 54 percent saw increased numbers of former homeowners looking to rent. At the same time, more renters appeared to be renewing their leases rather than moving, the survey found. …

I’ve noticed the same trend.I_rented_housing_bubble

Signs of financial distress among renters have been rising for some time.More than one in four renters, or around 11.2 million households, were severely burdened by their rent — or those spending more than 50 percent of their income on rent — according to 2013 data, up by more than 3 million since 2000, according to research from Harvard University’s Joint Center for Housing Studies (JCHS) and Enterprise Community Partners.

Adding in those facing “moderate” burdens — or spending 30-50 percent of income on housing — brings the total proportion of people giving up a serious chunk of their income to rent to just under half of all renters, the JCHS study said.

The number of households severely burdened by rent is set to rise at least 11 percent from an estimated record 11.8 million this year to 13.1 million by 2025, the study estimated.

There are two schools of thought on what this means for housing.

One theory is that rising rents will cause house prices to rise. In many areas, prices have reflated back to the peak of the housing bubble, and affordability has plummeted, but despite these signs, my monthly reports still show the market as fairly valued. Further upon examining individual properties, most are still selling for prices near rental parity, even in nicer neighborhoods. Part of the reason for this is low interest rates, but the other part of the equation is rent, and rents are very high.

If rents are high and rising, it pushes people to buy — at least those who have the down payment necessary to make the purchase; therein lies the problem that drives the other theory on what this means for housing.

High rents are forcing people to put higher and higher percentages of their income toward housing. This crowds out other uses for money, particularly saving. If people aren’t saving, they aren’t acquiring down payments, and without down payments, they simply aren’t buying houses.

Over the long term, rents that rise at rates faster than wages becomes a drag on the for-sale housing market. Potential buyers want to buy because they recognize it’s the only way to get control of their housing costs, but they can’t buy because they don’t have the down payment.

Look for legislators to find a way to embrace zero down lending once again to solve this problem, despite the far more serious problems it will create.

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