VANITY - Will real estate foreclosures drive rents up?

[PinkChampagneonIce]

Dear FRiends,

I have been reading so much about the correction in real estate prices that seems to be going on. General consensus is that people bought more than they could afford because of easy credit. Now, unemployment is rising and the value of homes is dropping, resulting in many people being "upside-down" on their mortgages, then losing their houses to foreclosure when they lose their jobs or adjustable interest rates increase. This is creating a surplus of housing, driving prices lower. All this makes sense. But what I have yet to see discussed is where these people are going to live.

Obviously, some will live with relatives, or become homeless. But most will rent. Does anyone have an analysis of whether rental properties will thus become scarce and rents go up, thereby shifting more money to the owners of rental properties, encouraging more people to buy investment properties, and thus raising prices on investment properties?

Where I live, it costs more to rent than to buy. The problem people have is coming up with the down payment. Rental housing is thus always in more demand than real estate. If there are a lot of foreclosed properties, wouldn't investors want to buy them and rent them out? How would this effect the market and economy? One obvious thing would be to shift assets to those with the money to buy investment properties.

I don't understand economics very well, and would really appreciate the comments of FReepers who know something about this.

Thanks!

[gorush]

IMHO, rents will fall as more properties become available. But I’ve been wrong before.

[PinkChampagneonIce]

That would have been my first thought, too. However, unless (and this is a big assumption on my part) there were many vacant housing units before this all started, the people who no longer own their houses due to foreclosure are going to have to go somewhere. Maybe they will double up with relatives or friends or find other solutions. I didn’t get the impression that there was a huge stock of vacant housing before this “correction”, but, of course, there would be substantial regional differences in housing availability.

Or, maybe, there aren’t enough foreclosures for these displaced people to have much of an effect on the general economy, regardless of what they do.

[Star Traveler]

You asked — Does anyone have an analysis of whether rental properties will thus become scarce and rents go up, thereby shifting more money to the owners of rental properties, encouraging more people to buy investment properties, and thus raising prices on investment properties?

—

Ummm... vacant and previously owner-occupied houses... they get “rented” out... :-)

Heck! If the mortgage holders were smart enough, they might even rent the house out to the previous owners until a future time that they decided to dispose of it...

[RegulatorCountry]

An increased number of renters due to foreclosure, will be offset by decreased cost to acquire rental properties due to foreclosure. Also, the generally poor economic conditions will lead to increased combined households, reducing the influx of households that rent.

So, to make it short, I wouldn’t bet on it. There’s quite the overhang of overbuilt apartments here, too. How about where you are?

[gorush]

I drive all over the State of Wisconsin...upwards of 1500 miles per week...there are ALOT of houses on the market right now.

[parsifal]

I’m betting rent will go up and gov’t will have to subsidize.

parsy, who does not underestimate greed.

[fso301]

I think you will find that in many areas, most foreclosures had never been occupied or, were not homesteaded at the time of the foreclosure filing. This means they were new construction bought by speculators or, existing homes bought by speculators. The actual owners presumably have a home.

[PinkChampagneonIce]

It would seem to make sense that a lot of vacant properties would mean a lot of properties for people to rent, driving prices down. But banks don’t rent out foreclosed properties, they put them up for sale at reduced prices. Therefore, as you say, it would cost less for investors to acquire them, assuming the investors are able or willing too. Maybe they won’t be, considering how volatile the market is. Maybe the price at which they are willing to do so might be a better predictor of where “values” are going.

I live WAY out in the country. Housing is very affordable here. Someone making $10.00 per hour can easily buy a large comfortable house, usually on some land. But, as I said, the down payment and credit score preclude many from doing even this easy thing. As there is almost no excess housing, rents are higher than mortgage payments because the people who own and rent have to make a profit.

[silverleaf]

I am betting govt will “subsidize” rents by continuing to nullify contract law (like leases) and shift the burden to property owners.

“Govt” will make it impossible for landlord to raise rents, or evict tenants, even if the house is foreclosed. “Govt” may make it impossible to deny someone tenancy for ANY reason, even bad credit. This is happening already in some areas, especially blue cities.

[smokingfrog]

Probably depends on where you live, but I don’t see things changing very much unless inflation starts to get way out of control.

[PinkChampagneonIce]

Thanks, fso301. I hadn’t thought about that. I wonder how many of the foreclosed units were built for speculation? I guess many of them, as speculation seems to be what caused the problem.

Obviously, the bank isn’t going to go into the rental business.....or, maybe they will? Someone would have to buy these speculative properties and then rent them out. Right now, many people with money have taken it out of the stock market and CDs because the interest rates are so low, and are holding on to cash looking for something to invest it in. The general feeling is that they DON’T want to invest it in real estate right this minute, because they expect the prices to go even lower.....

[bornred]

Depends on who the “foreclosees” are by you. If they were mostly speculators, the area will realize a net increase in vacant units. If they were mostly owner occupants, the demand will merely shift from houses to apartments.

In general, condos and new developments in the exurbs attracted the most speculation. The barrier to entry was relatively low, and most people who could afford to live somewhere better did so.

These are good times for people who saved their money instead of living off credit during the boom.

[Attention Surplus Disorder]

The effects (of all the foreclosures) on rental rates in general is 1: not uniform in all areas 2: not a constant 3: not entirely dependent upon black/white “rent vs buy” calculations and 4: not necessarily controllingly relevant to you if you are asking the question about what YOU should do. You don’t live in a statistic or in national or even regional averages; the rent (or purchase) deal you might be able to strike w/a an owner in trouble could be outliers.

1: In bubbly areas, as you’ve implied, it’s still *generally* cheaper to rent than to buy. In non-bubbly areas, pre-bubble it might have been cheaper to rent, then more expensive to rent, maybe now cheaper to rent. THE ONE always-true rule/admonition I will give you, overarching I may post here is, when it comes to real estate NOTHING beats local knowledge. So, a sort of corollary to that is, general statistics, while they have a non-trivial influence, can truly mean NOTHING when it comes to YOU looking for the ONE DEAL you may be looking for. [it’s not clear to me whether you are asking your original question from the standpoint of a potential homeowner, a potential investor, a current homeowner/investor, or somebody who’s just worried about statistics as an intellectual exercise!]

2: Nuff said.

3: At least in my humble opinion, “rent vs buy” isn’t quite so simple as it once was. As an example, I happen to live in CA. We’re broke, as a state. Now we happen to have proposition 13 which limits the amount that prop taxes can be raised year over year. But there is and is surely going to continue to be widespread clamor to raise raise raise taxes going forward; otherwise, [for example] perceived school quality may be seen as suffering. I can tell you as a realtor that local public school quality is probably the single biggest contributor to home values, other things being equal. Where I live, near one of the state’s highest rated elem schools, the exact same house in the same zip code in the same town but in a diff school district and thus not eligible to attend this particular school is worth $100-$120K less on a $750K house. That ain’t chopped liver. My point is that the “buy” side is certainly going to be under relentless tax attack by our gifted leaders going forward.

4: Nuff said. (sorry, it’s hotter than hell and I’m being lazy!)

[RegulatorCountry]

In a right-side-up world, it should cost more to rent than to buy a comparable property. That's the way it's always been, outside of speculative runups like the one we're suffering aftereffects from right now. And, I thought it was affordable in my part of NC. Where on earth can someone making ten bucks an hour afford a large, comfortable house on acreage?

[3niner]

The bubble caused a lot of excess housing to be created. Many Boomers bought Summer and Winter homes, and have since shed the extra cost. In our area, speculators bought multiple homes, which they planned to flip, many of these homes were never occupied.

Many houses are larger than people need, and it is a common practice to increase the number of occupants in a house, when times get tough.

[johnandrhonda]

foreclosures will not drive rents up.

[fso301]

Thanks, fso301. I hadn’t thought about that. I wonder how many of the foreclosed units were built for speculation?

My understanding is the majority. If your area is booming but you do not intend to leave, it does you no good to sell the house you live in so, the only way you can participate in the party is to buy another house.

That having been said, there were those speculators who "moved up" selling their existing home and taking advantage of low rates to buy a much larger home. Many of those recognizing the music had stopped and still having their credit intact, decided to "downsize". Once safely into their smaller home, they stopped payments on the McMansion.

My understanding is lenders have pretty much put the clamps on this particular profile now.

[PinkChampagneonIce]

ASD - THANKS for the trouble you took to give me some really interesting information. It’s HOT here, too....last I checked, heat index was 107. I am NOT going outside to check on it.

Part of my interest in this is just intellectual curiosity....I have a sort of half-hearted interest in property values because I kinda/sorta/maybe have a house I own up for sale. It’s an on-again, off-again thing, because I can’t figure out how much to ask for it.

RegulatorCountry, I live on 25 acres of rolling hills, covered with trees, abounding with game and other wildlife, in northeast Oklahoma. I used to live in California. I don’t want you to have a heart attack or anything, but I just got an offer on the above-mentioned house I have for sale. It’s 1800 square feet, 3 bedroom, 2 bath, central/heat and air, on 3+ acres with a barn. The offer was reasonable for the area - $69,000, which works out to $395.00 per month after a 20% down payment. I like the people, but I’m pretty sure they aren’t going to be able to qualify......LOL!

[Bronzy]

I have rental property. I will lower my rental income expectations before ever signing up to be a section eight landlady. Just a thought I had while reading this thread.