I was reading a recent article (READ HERE) which attempts to shed some light on the relationship between renting a home and owning a home. The article contends that home ownership is at a 14 year low and that with historically low mortgage rates and depressed real estate prices demand for home ownership should be primed for a dramatic increase. They feel that another driver in support of this trend is the fact that rents are increasing throughout the country again making home ownership more attractive.
While it would be nice to ride this wave of optimism, I have some concerns. The article really doesn’t address why housing dropped to a 14 year low. My suspicions are that 1) The housing market was way over sold to begin with and recklessly loose lending standards and artificial Government intervention helped to drive people to owning a home verses renting one. 2) We became a bit less transient because of home ownership. In the past when struck with unemployment one could simply sell their home or terminate their lease and move to where the jobs were. But as it became harder and harder to sell a home in this environment and prices have declining rapidly the unemployed or underemployed found themselves unable to relocate without walking away from their housing obligations and damaging their credit. 3) As the demand for housing increased the new construction markets boomed in attempting to keep up with this new wave of demand adding an unsustainable amount of inventory to the mix. These factors primed the pump for the largest fall from grace our real estate markets have ever seen.
So while I believe there will be some pressure for renters to more strongly consider buying a home in the face of higher rental payments, I think there are other factors that may also enter into this decision. If the renter is renting because they no longer qualify for a mortgage due to damaged credit from either a short sale or foreclosure, they will probably remain in the rental pool for the foreseeable future. Also, if their employment status is shaky renters may need remain flexible verses anchoring themselves to a mortgage. The final realization I don’t know that the article addresses is the fact that there are a number of investors flooding the market and purchasing cheap homes to turn into rentals, and developers, at least in North Idaho, have been building new apartment complexes to handle the increased level of people who have chosen to rent vs. own. As the rental property inventories increase there should be downward pressure on rents which would in turn remove some of the motivations towards home ownership on which the article’s authors are counting.
Here are the positives for the Coeur d’Alene area. We continue to watch our housing inventories drop. Last year inventories dropped around 10% and further declines will bring us into a more normalized housing market. I think our market here in North Idaho will continue to improve and we should start entering a more normalized and sustainable market going forward. It is a great time to buy but I am not sure tenants will be as big a driver for this growth as suspected. Stay tuned – exciting times ahead for sure.