Residential rents are at the crisis level, according to real estate economists who addressed a gathering of the National Association of Real Estate Editors in Miami on June 26. In addition to crowding out renters’ other budget items, including necessities such as dental care, the ongoing lack of affordability is hindering the market for home purchases. “Today’s renters are tomorrow’s buyers,” noted Zillow chief economist Stan Humphries.
There is a “dramatic imbalance between supply and demand,” Humphries said. For almost a decade, he noted, nearly all new household formations have been by renters, including people who were forced into renting by foreclosure. Over the past year, rental rates have grown 4.3 percent, outpacing the 3 percent growth in home prices. In many metro areas, the affordability problem is acute, with renters forced to spend more than 25 percent of their incomes on rent. In San Francisco, he noted that people may have to devote 46 percent of their income to rent. “There’s nowhere people can hide. You can’t afford to buy a home, and you can’t afford to rent a home.”
Rent increases are at a seven-year high, said Lawrence Yun, chief economist of the National Association of Realtors. And because rent is one of the biggest contributors to the Consumer Price Index, that will help boost inflation rates to about 3 percent toward the end of the year, Yun said, ensuring that the Federal Reserve Board will raise interest rates. “Rent increases will continue; it’s guaranteed,” he said, citing increased demand.
Because many investors purchased foreclosed homes during and after the financial crisis, 3 million single-family homes were shifted into the rental category and out of the owner-occupant category, said Frank Nothaft, chief economist of data company CoreLogic. Today, single-family houses represent 40 percent of the rental housing stock in the United States. The rents on these units have risen by 4 percent over the last year, but the increase has been in the double digits in high-demand areas.
Sales of new and existing homes will increase 5 percent this year, Nothaft predicted. That will make it the strongest sales level since 2007. The inventory of available for-sale houses has been “extraordinarily lean,” he says, in large part because construction has been held back by the unwillingness of small community lenders to make loans to small homebuilders. Nothaft said that many owners are staying out of the market, locked in place by the low interest rates—sometimes below even 3 percent—on their current mortgages. And equity remains a problem. Some 10 percent of homeowners, or about 5 million households, who have mortgages are still underwater on their loans. Another 1 million homeowners have only slight equity. Student debt held by would-be first-time buyers, and relatively tight mortgage underwriting standards, continue to hinder home sales. “We want credit standards to be tighter than in 2006,” Nothaft said. “But they are tighter than in the late 1990s, 2000, and 2001.”