It’s all about supply and demand, right? Or it’s the new normal. Today’s real estate market is very different from the market of 2004 or 2005. The fact is the affects of the Great Recession are going to remain with us for a long time. It created fundamental changes in the economy and real estate markets in particular.
It’s a combination of many changes that are still in the process of working themselves out. First, as the economy improves and the younger generation is finally able to find living wage jobs, they are moving out of their parents basements but as they do they rent before buying. That’s a huge driver in the soaring rental market for both apartments and single family houses.
Second, after seeing so many mortgages go under water and so many go through foreclosure, the younger generation, as well as the more mature generations, have simply become fearful of taking on the risk associated with the amount of debt that mortgages involve.
Third, the baby boomer generation is moving into retirement. If they have a paid off home or a low mortgage balance, many are deciding to stay in the home they have lived in for decades. Even if they had previously desired to retire to a better climate, the new economic reality is preventing that from happening.
Possibly more importantly is the change in the mortgage landscape. In 2012, Wells Fargo originated 23 percent of all home mortgages. At the end of 2014, that number plummeted to 13.5 percent. Chase, the second largest mortgage lender, saw its mortgage origination business cut almost in half over the same period of time. Now, ask yourself where is the new mortgage money coming from in a surging real estate market?
The new money is coming from nonbank lenders. The Dodd-Frank Congressional act is responsible for much of this shift in lenders. Traditional banks are heavily affected by the new consumer protection laws while the nonbank lenders are less affected (although the nonbanks are governed by other security laws). The top 20 nonbank mortgage originations grew to 37.5 percent in 2014 compared to only 7.5 percent in 2011.
When the real estate market began recovering in 2011 and 2012, the nonbank lenders favored either major investors with a lengthy history of profitability in the rental markets or big investor backing REITs. That has now shifted to lower level investors that can show a history of positive cash flow rentals. These new lenders are more interested in seeing a viable business plan from investors than they are in a primary homeowners’ income which can be disrupted by the next recession or for a multitude of other reasons.
A recent Harvard University study (as well as many other studies) has found that the percentage of Americans owning primary homes is down while the demand for housing continues to grow. That growth is happening in the investor community, which in turn is driving rents higher.
Make no mistake, these are not all of the factors changing the new real estate market but they are among the biggest drivers.
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