Real estate investors that bought in at the bottom of the market are rejoicing in the positive results that they are now seeing. Although the foreclosure crisis is beginning to fade into the rear view mirror, it is still having a profound impact on both the rental and home purchase markets.
Rents are and Will Continue to Increase
Landlords will continue to see rent increases for the next several years. Even in markets that are seeing substantial numbers of new units come on the market, rents continue to increase. There are two driving factors as a lingering result of the Great Recession.
First is the seven-year hit on a person’s credit rating that a foreclosure creates. Additionally, Fannie Mae imposes the same rule with an exception. If a person can prove that the foreclosure was caused by extenuating circumstances, the time between foreclosure and home purchase can be reduced to three years. Freddie Mac imposes similar rules. Extenuating circumstances include divorce, catastrophic illness, and layoff.
The second reason is that although employment rates are improving, the jobs people are accepting pay less than those they previously had. In some large city rental markets, renting now consumes 50% or more of people’s income. It’s unfortunate that they can’t buy because although home prices have been rising, in hot markets the cost to own can be as much as 19% less than the cost to rent.
One Big Reason Why Rents Will Continue Climbing
Cash rich investors took advantage of a great opportunity. When housing prices bottomed out, they bought in big numbers. These aren’t small time investors. These are hedge funds and REITs (real estate investment trusts). Tens and hundreds of millions of dollars pooled together to invest in real estate.
This pooled money bought foreclosed houses in bulk. Often a thousand houses at a time from Fannie Mae and Freddie Mac. These investors now own large tracks of rentals that dominate rental markets. They can and will set the market rate for rent. They are in the game to make huge profits.
Buying Conditions Remain Tough
Even people with a decent credit rating continue to find qualifying for a mortgage to be tough. People that managed saving between 15% and 25% for a down payment are being turned down for a mortgage. Certainly, people with a foreclosure are not going to qualify for a loan anytime soon.
According to Freddie Mac, buying is an average of 41% cheaper than renting nationwide. And Forbes magazine says this year that buying is much more affordable than renting in all of the 100 largest metro areas in the nation. However, people simply can’t get a loan.
This year nationally, rents are up 3.5% and home prices are up 7%. Both can be expected to continue climbing. If mortgage qualification remains insurmountable, you can expect rents to climb substantially in the coming months and years.
Another factor that will drive rents up is that young people no longer see home ownership as the American Dream. Instead, in light of the Great Recession, they view retirement security and being debt free as their number one goal in life.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
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