Housing prices in the U.S. hit a peak in 2006, but since the market crashed in 2007, things have been mostly downhill from there. Until now. In recent months, many real estate experts have expressed confidence that the U.S. housing market has finally hit bottom and is beginning to turn around.
That rebound comes mostly as a result of the actions of one major group: Investors. But while most people feel that a positive shift in real estate prices is long overdue, some critics feel that investors cause some problems of their own — and may even be preventing the housing market from recovering.
Investors Are the Problem: Low Home Prices, High Rents
The National Association of Realtors estimates that one-third of real estate purchases in the U.S. are already investor-related, and that number is expected to grow under the rising pressure of rental demand.
Since the real estate market crashed, plummeting home prices and low mortgage interest rates have combined to make landlording very profitable, especially as a depressed housing market and an increased demand for rentals has pushed rent up in many areas.
For non-investors, however, the situation hasn’t been quite as positive. According to Trulia, U.S. rents rose 5.4 percent over the 12 months ended July 30th. In some areas, renters were hit even harder; in San Francisco, rental rates rose nearly 15 percent over the same period. Oakland, Denver, Miami and Boston also saw double-digit rent increases.
Technically, high rent makes buying a home more affordable compared to renting, but combined with tighter lending standards, low employment and high consumer debt levels, a mortgage just isn’t in the cards for many consumers.
Finally, while investors are snapping up properties that might otherwise be left vacant, poorly rented homes can depress property values in a neighborhood as well. According to Bloomberg, government-supported mortgage financiers Fannie Mae and Freddie Mac are exploring bulk sales of seized properties to investors, who would then rent them out. They are proceeding with caution here, however, due to the concern that large blocks of investor-owned properties could have other consequences in terms of property values.
What this suggests is that while real estate investors have a role in turning the real estate market around, investor-owned properties carry some risks of their own for the housing market.
Real Estate Investors Part of Solution: Market Stabilization
In May, The Demand Institute, a think tank operated by research organizations The Conference Board and Nielsen, released a 50-page study that labeled 2012 as the year of the housing bottom. According to this report, the first stage of the recovery will be driven by rental demand, wherein investors snap up cheap properties to satisfy that demand.
But what comes after that stage is even more important: The report states that investors’ actions here should help to stabilize the rental market. If that happens, banks may be able to loosen their stingy lending standards, which should benefit a wide range of potential homebuyers.
When home prices are falling, banks don’t dare issue mortgages to anyone but the most credit-worthy borrowers; when the markets are on the rise, banks can afford to offer more generous terms, which could give more renters an opportunity to enter the real estate market themselves.
Finally, stabilizing prices in the market could lure first-time homebuyers and those looking to trade up to take the plunge into a real estate purchase. After all, a lack of action in the market isn’t just a result of a lack of affordability — many people are simply waiting on the sidelines for conditions to improve before making any big financial decisions.
To Rent or Buy?
While this is undoubtedly looking to be a good year for investors, a real estate market rebound may also represent an opportunity for renters. If lending standards loosen up, homeownership may become a realistic goal for many consumers again, especially for those who’ve been disciplined about saving and paying down debt.
And while news about the housing market has been largely doom and gloom for several years now, there are some solid reasons to become a homeowner.
For one, rental rates in many cities exceed the cost of a mortgage payment on the same home — especially with the current low prices in many markets. Plus, renters face additional risks, such as rental increases, which can generally happen at any time and be of any size unless otherwise specified in the lease.
Finally, renters can — and often are — evicted from rental properties, whether because the landlord/owner becomes subject to foreclosure, wants to move into the property or is aiming to sell or make another use of the land.
For most renters, these are not life-and-death problems, just major inconveniences, but they do sweeten the deal for those who are considering home ownership. And if investors do manage to improve the market enough, aspiring homeowners may just get the opportunity they’ve been waiting for.
Are Landlords to Blame?
Investors have certainly had a strong influence in real estate markets in recent years, and 2012 is looking to be no exception. For consumers, this has had both positive and negative repercussions. If The Demand Institute is correct, investors and landlords aren’t preventing the housing market from recovering so much as acting as the first wave of a larger recovery, one whose benefits will eventually extend to consumers as well.