As More People Rent, Housing Rebound Questioned

House prices are up, but buy to rent dominates
September 17, 2013 Updated: September 17, 2013

Real estate market experts are questioning the sustainability of the rebound in the U.S. housing market. They reason that investment firms and individual investors, and not those who would use the houses as a residence, have bought a significant number of homes. Therefore, it can’t be considered a true rebound of the housing market. 

The quantity of home purchases by investors “raises the question of whether rising home prices really indicate a sustained market recovery, or if the growth is just a facade fueled by Wall Street,” a Daily Finance article states. 

The article ends with a cautionary note: “The most important takeaway is that the underlying housing environment may not be as rosy as Wall Street has made it out to be.” 

Investors buy many homes and convert them to rental properties, and first-time buyers are priced out of the market. First-time buyers can’t compete with investment funds that are flush with cash. 

Historically, first-time home buyers are an important factor in a rebound. However, the National Association of Realtors (NAR) states that the number of first-time buyers dropped from approximately 40 percent over the past three decades to 30 percent in the last year, which doesn’t bode well for the real estate market, according to a report by the Consumerist. 

It isn’t only that first-time buyers have been squeezed out of the market because of investors, but rigid underwriting standards, larger down payment requirements, and high student loan debts are also part of the equation.

Additionally, a recent increase in mortgage rates is another driver of the real estate market slowdown. This makes it more difficult to borrow in the long term. 

For example, a 30-year fixed-rate mortgage was at 3.80 percent in September 2012 and has risen to 4.75 percent by September 2013. The 15-year fixed rate mortgage changed from 3.09 percent to 3.82 percent during the same period. 

Residential Sales Cast Doubt on Rebound

One could argue that there is a rebound as houses are being sold, despite the loss of first-time buyers. However sales of new houses fell by 13 percent to 394,000 in July compared to the prior month, according to the latest U.S. Census Bureau report. 

Also, pending home sales have decreased, according to NAR reports. The Pending Homes Sales Index declined 1.3 percent from 110.9 in June to 109.5 in July. 

In addition, single-family home and condominium inventories increased from 2.2 million in June to 2.3 million in July, indicating that sales have slowed down, according to NAR data reported by the National Association of Home Builders (NAHB). 

In fact, most market researchers report a recent slowdown in house sales or an increase in home inventories. Inventories increased by 2.4 percent in August, based on the latest Movoto Real Estate State of the Market Report. This is abnormal because home inventories generally decline at the end of the summer months. 

“As a result of the increased inventory and reduced price per square foot, we feel that the market at this time is moving towards a buyer’s market,” the Movoto report states. 

There is a buyer’s market, according to a recent Trulia Price Monitor blog, because “asking home prices decreased 0.3% in July—the first month-over-month decline since November 2012.” 

Trulia uses the asking price of a home to predict a decrease or increase in the price of a house. 

According to Trulia, the change from a seller’s to a buyer’s market can be seen more clearly on a quarterly basis. The asking price was up 3.3 percent in July, but this is below last quarter’s 4.2 percent, which indicates the shift toward a buyer’s market. 

Foreclosures Affect Rebound

A slowdown in home sales increases housing inventories. Furthermore, while the rate of foreclosures has decreased, any foreclosures will increase housing inventories. This doesn’t bode well for a rebound. 

Daren Blomquist, vice president at RealtyTrac, said in a September report, “Foreclosure flash floods will continue to hit some markets over the next few months as delayed foreclosure starts are quickly pushed into the pipeline.” 

There are many predictions about the meaning of the foreclosure inventory numbers. However, according to knowledgeable sources, there may be a significant number of homes in the foreclosure process or already foreclosed on that may not have hit the market. Therefore, all the foreclosure numbers are guesses.

Using July data, Corelogic reported on the latest foreclosure numbers. As of July, there were 949,000 homes in the foreclosure process nationwide, a decrease from the 1.4 million homes in July 2012. According to Corelogic, there have been 4.5 million foreclosures completed since September 2008. 

There are also fewer monthly foreclosures. In July, banks completed the paperwork for 49,000 foreclosures versus 65,000 in July 2012, a 25 percent decline. 

On the other hand, if one includes the shadow inventory, the numbers increase to a housing inventory of close to 3 million houses. Shadow inventory includes houses that have not hit the market yet and those with loans that have not been paid for more than 90 days. 

According to a Corelogic May report, the shadow inventory decreased from 2.4 million in April 2012 to just below 2 million houses a year later. When compared to the January 2010, the shadow inventory decreased by 34 percent from 3 million houses. 

Renter Nation 

The large housing inventory has decreased significantly since the height of the recession. However, a significant number of homes were not bought by individuals, but by investment firms.

For example, the Blackstone Group L.P., a multinational investment firm, “has been busy buying up scores of single-family homes at dirt-cheap prices, fixing them up, and then turning around and renting them out,” according to a recent Street Authority Daily report. 

The renter’s market has hit a 16-year high, according to a Census Bureau and Bank of America Merrill Lynch Global Research report. 

In the past, this country has overcome the Great Depression, inflation, and other obstacles. From a historical perspective, today’s rental nation might again change to a nation where more and more people will own their homes.