REO Rentals: The Overlooked Variable to Solving the Housing Crisis in the United States

Until recently, little or no consideration has been given to government policies that would promote renting as an alternative to homeownership to help solve the mounting problem of an oversupply of homes in the United States. However, a recent report written by Danilo Pelletiere for the Federal Reserve Board seems to provide a very strong case where the Fed would be remiss if it did not take note.

At the Crux of the matter is a gross overbuilding of housing over the last three decades fueled by easy credit to both builders and consumers. The Census Bureau has estimated that there are 131 million housing units in the country, but only 112 million households to fill these homes. This figure would imply that, at any given point in time, there are 19 million vacant homes (14.5% vacancy rate) out there… a daunting number that is at the heart of the housing crisis and neighborhood instability.

In his report, Pelltiere states that “Unlike agricultural commodities, which can be easily removed from the market to help stabilize prices, removing vacant homes-either proactively or through neglect….not only destroys the housing but can detract from the value of neighboring properties, leading to further price instability.” The key to neighborhood stabilization is to keep occupants living in the communities as much as possible.

There are a number of ways to accomplish increased occupancy of homes. Many resources have been thrown at loan modifications and other loss mitigation programs with mixed results at best. Renting back to the home borrower in exchange for the deed has also been a large focal point with only minimal results.
Because of the low success rates of these programs, there should be options to selling a property in an already flooded market. By offering vacant properties as rentals rather than for sale, perhaps young adults living at home would find the prospects of renting appealing, thus creating new households.

The primary obstacle to this plan is that much of the vacant home inventory is held by banks. Banks historically have not been in the property management business and seem to have little incentive to venture into this new arena. However, Pelltiere argues that “Policies to address these challenges should include stepped-up enforcement of bank-owned homes and technical assistance that focuses on being good local landlords.”

In addition, there are several high quality property management companies and associations that would gladly partner with banks, Fannie Mae, and Freddie Mac at local levels to help accomplish this objective. Last month, the National Association of Residential Property Managers (NARPM) proposed ideas to HUD Secretary Donovan to help increase the focus on rental strategies. We are hoping that this is seriously considered by the administration.

Pelltiere concludes his report well. “Renters are an integral part of most communities, and keeping rental properties occupied is as much a concern to the recovery of these places as maintaining homeowner occupancy,” he writes. “Plans and policies that accommodate just owners, whether directed at the recovery or instituted previously and for other purposes, will not help all the households that need assistance and will only delay a return to higher occupancy levels and housing market vitality.”

The State of the Seattle Area Residential Rental Market

Many of you may have seen the March article on MSN that ranked Seattle as the top declining rental market in the nation. The article stated a twelve month decline in Seattle rental rates of 13.7% which was quite alarming and a surprise to many of us in the industry.
While there have been some declines in rental rates over the past 18 months, we don’t believe that it approached the number stated on the MSN article. In fact, we are beginning to see the rental market firm up in many sectors including single family homes and individually owned condominiums.
The declines experienced in prior months were largely due to an over-supply of homes on the market from “would-be” sellers. Those that would have preferred to sell if there were enough buyers at the right price. As a next best alternative, many of these “would be” sellers became landlords by default. These newly minted landlords would sometimes needlessly drop their rental prices out of panic or just as a means of finding a quick Tenant. This phenomenon definitely added to the downward pressure on rents.
In recent months we have experienced a steady firming of the rental market and are again seeing some, albeit slight, year-over-year increases in rent renewals. We believe that this can be attributed to several factors:
• An increase in home sales has given potential home sellers more hope and incentive to keep their homes listed for sale instead of listing them for rent. This has worked to limit the over-supply of homes on the market and relieve some of the downward pressure.
• Since January of this year we have witnessed a significant increase in rental inquiries. We believe that as general economic conditions showed signs of improvement, many tenants that may have been “hunkering down” with family or roommates were now confident enough again to commit to their own home.
• As lay-off victims now begin to find new employment, there are simply many people on the move. Although we see many moving from the area to find new employment, we are also seeing many more moving into the area to take a new job. A significant number of these are seeking rental homes.
• Finally, it seems important to note that many potential home buyers of past years are questioning the conventional wisdom of homeownership as a wise financial decision. Even at today’s significantly decreased acquisition costs, a typical Seattle Metropolitan home will rent for around $1,000 per month less than the cost of owning it (interest, property taxes, insurance, maintenance, etc.). The increased demand for quality rentals from this sector is not to be ignored.
While we are, no doubt, still in a “renters market”, there is a stabilization force taking hold. Of course, all of the above factors will also create opportunities for some. For example, those tenants that have been renting for years and have escaped the hit on net worth that many home owners have experienced are now sensing the right time to finally buy a home for themselves. Also, rental home investors (especially those not needing financing) don’t have to look far to find bargains.
The trends will likely take many more twists and turns on the road to recovery but are once again beginning to show signs of predictability and stabilization.

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T-Square Properties

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