Most Single-Family Renters Will Continue to Rent Rather than Buy Their Next Home

Fannie Mae's latest quarterly National Housing Survey (NHS) finds consumer pessimism growing with concerns about job loss, as 64 percent of Americans surveyed during the second quarter saying the economy is on the wrong track, the most for any quarter since the inception of the survey in the first quarter of 2010. That pessimism continued to mount in July, with Fannie Mae's monthly survey finding that 70 percent now believe the economy is on the wrong track, and just 23 percent say the economy is heading in the right direction.

"Consumers are more cautious due to concerns over employment and household finances," said Doug Duncan, vice president and chief economist of Fannie Mae. "As a result, consumer spending, which accounts for about 70 percent of the economy, ground to a halt in the second quarter. Consumers are more hesitant to take on additional financial commitments, and a setback to confidence means a setback to the recovery of the housing market."

Job Security

• Twenty-six percent of American workers report being concerned about losing their job in the next twelve months. While 44 percent of concerned American workers report having a home mortgage (compared to 42 percent of all Americans), just 33 percent of them perceive their savings to be sufficient (versus 49 percent of those workers not concerned about losing their job).
• Forty-four percent of these workers say their household expenses have increased significantly over the past year, compared to 35 percent of workers not concerned about losing their job.
• Employed Americans concerned about job loss are more likely than all employed Americans to say it is a bad time to buy a home and they are more likely to say they would rent their next home.

Single-Family Renters

• More than fifty percent of renters report living in single-family homes.
• Despite just 23 percent of single-family renters saying that renting makes more sense than buying a home, 53 percent say they would continue renting if they were going to move.
• Seventy-three percent of single-family renters say it would be difficult for them to get a home mortgage, with 33 percent citing their credit history as the biggest obstacle to getting a home mortgage (versus 20 percent of multifamily renters).
• Compared to multifamily renters, single-family renters are younger and more likely to have children.

Minority Mortgage Borrowers

• Thirty-one percent of minority mortgage borrowers report being underwater compared to 23 percent of non-minority mortgage borrowers.
• Thirty-five percent of minority borrowers say they are making a great deal of financial sacrifice to own, compared to 20 percent of non-minority borrowers.
• Minority borrowers are more likely than non-minority mortgage holders to live in states with above-average levels of negative equity and are more likely to report lower family household incomes (44 percent say their family income in 2010 did not exceed $50,000, compared to 23 percent of non-minority borrowers).

The Fannie Mae Second-Quarter 2011 National Housing Survey polled homeowners and renters to assess their attitudes toward owning and renting a home, confidence in homeownership as an investment, the current state of their household finances, views on the U.S. housing finance system, and overall confidence in the economy.

Duncan states, "Survey data make clear the relationship between home purchase demand and concerns about the stability of employment. Dissatisfaction about the direction of the economy and related employment fears are damping demand to buy homes and slowing the recovery. People who believe owning is a better deal than renting are nonetheless planning to rent, at least until things improve it would seem."

Other Survey Highlights

• Consistent with previous findings, most Americans think it would be difficult for them to get a home mortgage today (53 percent) and increases to 71 percent among renters.
• While 51 percent of Generation X Americans (age 35-44) say it would be difficult for them to get a home mortgage today, the number increases to 59 percent among Generation Y (age 18-34).
• Thirty-five percent of Pre-Baby Boomers (age 65 and older) say they know someone in their area or neighborhood who has defaulted versus 42 percent for Generation Y and 49 percent for Generation X Americans.
• Twenty-six percent of mortgage borrowers say they are underwater, compared with 23 percent in Q1.
• Underwater borrowers remain more likely to be stressed about their debt than all mortgage borrowers—42 percent of underwater borrowers say they are stressed about their debt, compared to 31 percent of all mortgage borrowers.
• Underwater borrowers are more likely to know someone who has defaulted on their mortgage—57 percent of underwater borrowers versus 49 percent of all mortgage borrowers and 43 percent of the general population.
• As in previous quarters, 2 out of 3 respondents support mortgage modifications, believing such programs help protect the economy and local communities from increased foreclosures and falling home prices.
• In line with previous quarters, 57 percent of Generation Y Americans (age 18-34) expect their personal situation to improve over the next year, compared to only 42 percent among Generation X (age 35-44) and 35 percent among Baby Boomers (age 45-64).

More News On the Souring Taste for Homeownership

Two more items have appeared in the expanding parade of articles that appear to be mounting evidence that the importance placed on owning a home just isn't what it used to be. The latest Housing Market Insights report from Morgan Stanley indicates high rates of mortgage delinquency, foreclosures and liquidations are turning homeowners into renters. In addition a Treasury Department White Paper spells out that it the role of the Federal Government in the housing market is changing from increasing the number of homeowners to providing housing options.

This appears to be playing out in the marketplace. A separate new report from housing search engine HotPads indicates prices on rental properties grew 6.7 percent in June.

Morgan Stanley analysts expect the trends to continue. They say GSE reform, Dodd-Frank securitization rules, mortgage interest deduction reform, continued home price declines and a long workout period for distressed homes, will likely make it harder to buy an owner-occupied home.

"As such, we believe that the U.S. will become a Rentership Society, in which the homeownership rate will keep falling, the home rentership rate will conversely rise, and the rental market will dominate the investment landscape in housing for years to come."

Are There Any Rungs Left on the Housing Ladder?

A new report from PIMCO highlights some of the demographic changes that are helping to swing the preference of Americans from home owners to renters. The report, Are There Any Rungs Left on the Housing Ladder?, suggests graduates with large student loans and older Americans retiring may not hold the idea of owning a home in high esteem. They also simply may not be able to afford it.

Rod Dubitsky, an analyst with PIMCO, says first-time homebuyers are struggling financially and are likely to be long-term renters. At the same time older homeowners are less likely to upgrade into larger homes or invest in second properties. "All of this suggests downsized housing choices — one home instead of two, rent rather than own, smaller place rather than large. These choices could serve to reduce the dollars committed to housing investment," Dubitsky says.

Seven Out of 10 Renters Say Owning a Home is a Top Priority

Most Americans still believe that owning a home is a solid financial decision, and a majority of renters aspire to home ownership as a long-term goal. According to the 2011 National Housing Pulse Survey released today by the National Association of Realtors, 72 percent of renters surveyed said owning a home is a top priority for their future, up from 63 percent in 2010.

Seven in 10 Americans also agreed that buying a home is a good financial decision while almost two-thirds said now is a good time to purchase a home. The annual survey, which measures how affordable housing issues affect consumers, also found that more than three quarters of renters (77 percent) said they would be less likely to buy a home if they were required to put down a 20 percent down payment on the home, and a strong majority (71 percent) believe a 20 percent down payment requirement could have a negative impact on the housing market.

“Despite the economic setbacks Americans have experienced in today’s current climate, it is clear that a strong majority still believe in home ownership and aspire to own a home,” said NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I. “However, achieving the dream of home ownership will become increasingly difficult for buyers if they are required to make a 20 percent down payment, which may be a reality for many of tomorrow’s buyers if a proposed Qualified Residential Mortgage rule is adopted. That is why Realtors are strongly urging regulators to go back to the drawing board on the proposed rule.”

Defining the QRM rule is important because it will determine the types of mortgages that will generally be available to borrowers in the future. As currently proposed, borrowers with less than 20 percent down will have to choose between higher fees and rates today – up to 3 percentage points more – or a 9-14 year delay while they save up the necessary down payment.

Over half – 51 percent – of self-described “working class” home owners as well as younger non-college graduates (51 percent), African Americans (57 percent) and Hispanics (50 percent) who currently own their homes reported that a 20 percent down payment would have prevented them from becoming home owners.

Pulse surveys for the past eight years have consistently reported that having enough money for a down payment and closing costs are top obstacles that make housing unaffordable for Americans. Eighty-two percent of respondents cited these as the top obstacle, followed by having confidence in one’s job security.

The survey also found respondents were adamantly against eliminating the mortgage interest deduction. Two-thirds of Americans oppose eliminating the tax benefit, while 73 percent believe eliminating the MID will have a negative impact on the housing market as well as the overall economy.

“The MID facilitates home ownership by reducing the carrying costs of owning a home, and it makes a real difference to hard-working American families,” said Phipps. “Home ownership offers not only social benefits, but also long-term value for families, communities and the nation’s economy. We need to make sure that any changes to current programs or incentives don’t jeopardize our collective futures.”

When asked why home ownership matters to them, respondents cited stability and safety as the top reason. Long-term economic reasons such as building equity followed closely behind. On a local level, respondents said neighbors falling behind on their mortgages and the drop in home values were top concerns. Foreclosures also continue to remain a large concern, with almost half of those surveyed citing the issue as a problem in their area.

The 2011 National Housing Pulse Survey is conducted by American Strategies and Myers Research & Strategic Services for NAR’s Housing Opportunity Program. The telephone survey polled 1,250 adults nationwide, with an oversample of interviews of those living in the 25 most populous metropolitan statistical areas. The study has a margin of error of plus or minus 3.1 percentage points.

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Should You Buy or Rent?

Is Owning a Home Still the American Dream?

A friend of mine recently called asking me whether it makes more sense to rent. He had been considering purchasing a home in the mid-West and was beginning to rethink the decision.

With lower home prices, high affordability and low interest rates, you might think its a no-brainer. But it isn't. Sure, you have to live somewhere, but if you're thinking of a home as an investment, what other investment would you consider if you thought it may be worth less a year from now?

Speaking at the National Multi Housing Council Mid-Year Apartment Strategies Finance Conference and Board of Directors meeting held recemtly in Palm Beach, FL, industry experts examined how apartments will change based on the preferences of today’s renters.

Observers and insiders say today’s renters want urban locations within walking distance of entertainment and employment.  They are willing to accept smaller apartments to lower their rent in these more expensive downtown neighborhoods, but they expect developers to incorporate more usability into a smaller footprint.  They are also very social and want places around the property to congregate.

Renting, it seems, is becoming a new normal.

A recent article in the Dallas Morning News supports this notion. In the June 2, 2011 article, Shontina Kuykendoll tells the reporter she's renting in part because she fell in love with a downtown neighborhood. The article also points out that more than 50 percent of residents in Dallas- a relatively affordable market, rent. Moreover, the U.S. homeownership rate is at the lowest level in more than two decades and still falling. Some 3 million have been converted to renters since the crash began around 2008.

So does it make some sense to rent? The calculators I tried with my friend suggested it does. After five years and spending just $125,000 on a home vs. $700 in rent, these programs suggest he'd actually be $7,000 or more ahead by renting than buying. We had to adjust the home price down to the high $70K's to tilt the scales towards buying.

That's not always the case. I tried it on the home I live using my purchase price and the current rental rate suggested by Zillow.com. It says I would save almost $20K by buying. Buying is better than renting, however only after four years. Recently relocating to DFW and then deciding to move again after only 1.5 years means taking a considerable hit. In the home I am planning to move to, this calculator says buying is better than renting only after seven years! My parents home in a small town in Pennsylvania came up with buying beating renting after only two years, however.

Today some people are choosing to rent because it is their preference. In many cases you can live in a more walkable area with amenities built for pedestrians if you choose to rent instead of buy. Other people are renting because they own a home somewhere else which they haven't been able to sell. In the process they may be sold on the conveniences of renting.

Should you rent or buy? These questions are not always easy to answer. The longer you plan to stay in a home, the more likely buying is the answer. The more frequently you move and the less time you spend at home, may tilt the scales towards renting.

The scales now may over-all tilt towards renting, and this is due to more than just problems in the housing market. It has to do with demographics, fuel prices and a simple change in preferences. Walkable urban life is in vogue, and in many cases there's a lot more availability and affordability in those areas with rental units.

As for my friend, I suspect he wants to own whether or not it makes perfect financial sense. There's also a case to be made for spending your money on something you desire.