Rental Market Changes May Affect US Homeowners

The U.S. economy in general may have mostly recovered from the housing crisis and recession that began around 2008. But by at least one measure, the homeownership rate, things are only just recently improving. That is indicative of a trend toward renting rather than owning, one that is nonetheless having an impact on many of those who choose the latter.

According to the most recent estimates from the U.S. Census Bureau, about 64 percent of U.S. adults  are homeowners, a slight improvement from last year when the rate hit a record low of less than 63 percent. Even so, the current rate of homeownership is still far lower than at any point in recent history. The rate peaked near 70 percent around 2004 and tracked close to 68 percent just before the latest recession.

Reasons behind lagging ownership

As Americans drift away from homeownership, for a variety of hotly debated reasons, they seem to be more attracted to renting instead. Corporations have responded to this surge in rental property demand by buying up large numbers of houses in several metropolitan areas. The Wall Street Journal reported on the phenomenon  as seen in Spring Hill, Tennessee, where investment firms have come to represent a significant portion of the homeowners in the area.

"More homes in suburban communities are being bought and converted into rental properties."

These companies, often run out of state and financed by public equity, operate by buying homes with all cash, no-inspection offers. The deals may close in as little as 12 hours, according to the Journal's report. They will then perform some renovations before offering the home on the rental market. One sale detailed by the Journal was sold in an all-cash offer for $208,000, and then listed at a rent of $1,575 per month. Around 5 percent of Spring Hill's housing stock is now owned by investment firms.

The Journal cited reports that estimated as much as $40 billion had been spent by investors on some 200,000 properties around the nation since 2012. That amounts to a bet that homeownership will continue to take a back seat to renting among American residents. It also is bringing big changes to the neighborhoods where rental properties are most prevalent.

One of the most significant impacts of the new buying spree on behalf of investment firms is being felt by homebuyers. With these corporations offering much better contract terms than what typical buyers can manage. This can make the buying process more laborious, and expensive, in some areas.

The investment firms counter that they provide an alternative to homeownership geared toward families who are unable to earn approval for a mortgage due to bad credit or low income. But compared to the lifetime cost of a standard 30-year fixed-rate mortgage, the Journal found the rent on these single-family homes to be one-third more expensive. That's factoring in rent hikes that average 3 percent annually.

Greater foreign investment

Adding a new dimension to this trend is an analysis of where exactly that institutional investment money is coming from. The New York Times explained that throughout the U.S. and other countries, more real estate deals are being financed by foreign buyers . China may be leading this chase for homes elsewhere - the National Association of Realtors estimated that Chinese investors poured as much as $153 billion into the U.S. housing market last year.

That level of investment has the effect of pushing up prices, according to NAR economist Lawrence Yun. That may be a good thing for anyone already in a home, but not for those looking to buy on a budget.

The net effect of this trend toward greater corporate ownership of rental homes is hard to understand in any certain terms. While it may contribute to higher home prices in some areas, most agree that higher demand, low supply and a growing economy have been the main drivers of increase house prices. Where rental properties are more prevalent, they may offer some benefits over homeownership for certain people, or could be thought of as just a different kind of stepping stone on the path to that goal. In any case, it's a development worth keeping an eye on.

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