With the passage of Wall Street reform now a done deal in Washington there are probably few people who did better than real estate investors. Stricter mortgage standards plus less federal emphasis on homeownership means there will be a new and growing demand for rental housing.
“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” Raphael Bostic, a senior official with the Department of Housing and Urban Development, told the Washington Post. “You’re not going to hear us say that. What we’ve seen in the last four years is that there really is an underside to homeownership.”
The change in government policies impacts the demand for investment real estate because a growing population combined with a smaller percentage of owner-occupants means more demand for rental property.
The Wall Street reform legislation homogenizes the mortgage marketplace and assures that there will be no shortage of conventional, VA and FHA loans. Lenders are entirely free to offer more exotic financial products, but only if they’re willing to set aside reserves, eliminate prepayment penalties and face potent lawsuits from borrowers and mortgage investors enabled by the new standards.
For buyers and investors with proper paperwork and visible finances the new loan requirements will be a low hurdle, however, for many borrowers mortgage applications will suddenly become more difficult. Application reviews will stiffen and lender standards will rise, meaning that many loan applications will be declined. We’re already seeing this with the new devotion to higher credit scores.
The tougher financing standards will create two results. First, there will simply be fewer buyers than might otherwise be the case. Second, there will be fewer buyers who can “stretch” and afford a bigger mortgage for a given income. In the end these two factors will create less pressure to push up home prices.
Rentals & Foreclosures
Since the end of World War II we have had a steady need for additional rental units to accommodate a growing population. In 1950 we had a population of 153 million, a figure that will soon top 310 million. Now we have massive numbers of foreclosures adding to demand.
For 2010, says James J. Saccacio, chief executive officer of RealtyTrac, “the midyear numbers put us on pace to exceed three million properties with foreclosure filings by the end of the year, and more than one million bank repossessions. The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market.”
No doubt many of those who have lost their properties have moved in with friends and family. That said, there are only so many basements and accessory apartments. Armies of people who once owned now need rental units.
Although there’s plenty of property demand that demand is not actionable. Individuals who might once have bought are effectively being shut out of the marketplace by such issues as tougher loan standards, unemployment, reduced wages, credit reports with major black marks and changing federal policies. And while such individuals may not have the financial muscle to buy a home, they often have sufficient income to afford a good rental.
Market data developed by Reis.Inc., a leading provider of commercial real estate information, shows two interesting trends.
According to its second quarter analysis of national apartment trends, Reis says occupancy improved in 67 out of 82 markets. “Vacancies fell for the first time in two years from 8.0 percent to 7.8 percent, as net absorption surged by over 46,000 units. This was the largest net positive addition to occupied stock on record in ten years. Approximately 70 percent of this addition to occupied stock came from existing buildings leasing up empty units.”
Fewer vacancies are good news for property owners, but what about rental rates?
Reis figures show that rental rates for apartments, the best barometer we have, increased steadily between 2005 and the third quarter of 2008. The last quarter of 2008 and all of 2009 saw rental rate declines. In 2010 we’re back to rising rental rates: Reis says rates were up .4 percent in the first quarter and .7 percent in the second quarter.
Time & Place
So is this the time to buy investment real estate, especially short sales and foreclosures?
In many markets there’s a fusion of discounted acquisition costs, historically-low interest levels, falling vacancy rates and rising rental rates. This doesn’t mean specific real estate investments are attractive everywhere or for all buyers, but in areas where such trends exist and seem likely to continue this may well be an unusually good time to consider short sales and foreclosures, two ways to acquire discounted real estate.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.