Foreclosure Crisis Hits Rental Market!

Submitted by SadInAmerica on Mon, 04/14/2008 - 1:38pm.

It's no secret that the nation's subprime mortgage meltdown, spike in foreclosures and fall in home prices have affected legions of homebuyers, home sellers and homeowners.

But what may be surprising is that the turmoil in today's U.S. housing markets has important implications for renters as well. "There is some pickup in demand, but there is also a pickup in supply—both new apartments that are being built and also units shifting from owner to renter," says Mark Obrinsky, chief economist of the National Multi Housing Council, or NMHC, an apartment industry trade group.

Renters Lose Urgency to Buy a Home

Normally, much of the new demand for rental housing comes from young people who typically enter the housing market as renters, Obrinsky explains. But today, foreclosures have added new demand among credit-impaired former homeowners. Some of these people will double up with roommates while others will try to rent an apartment, condominium or house.

Renter Trends

More renters. Some renters have delayed homeownership because they're afraid of foreclosure or can't obtain easy financing. Some former homeowners have been forced back into apartments after a foreclosure or short sale.

More rental units. Some homeowners and builders have rented out condominiums or houses because they can't sell them today at a price that's acceptable to them.

More roommates. Some homeowners have taken in roommates to help pay the mortgage and avoid foreclosure. Some former homeowners have become roommates rather than renters because they've lost their homes and their jobs.

Until last year, many renters felt tremendous pressure to buy a home because prices were on the rise and financing was seemingly affordable. But now that pressure has subsided and many renters have decided to put off this major investment due to fear of falling home prices or an inability to obtain financing on what they consider to be attractive terms, according to Mark Verge, owner of Westside Rentals, an online rental listing service in Southern California.

That the exodus of renters from apartments to homeownership has slowed was apparent in a quarterly NMHC survey of apartment company executives. In July 2007, 55 percent of the executives surveyed said the subprime mortgage meltdown and tightening of mortgage credit had decreased the number of renters who'd left apartments to become homeowners. Six months later, in January 2008, that figure had climbed to 79 percent, a significant jump.

Yet the impact of actual foreclosures may be less important than the influx of new first-time renters and the psychological impact of foreclosures. Even 2 million foreclosures, a figure predicted by some analysts, would be a relatively small number compared with the nation's 35 million renters, Obrinsky notes.

Meanwhile, though, "horror stories" about today's housing markets have caused "more fear of buying" and have "turned a lot more potential buyers into long-term renters," Verge says.

Moreover, some former homeowners may not be able to rent until their financial situation improves. For these folks, the immediate aftermath of a foreclosure or short sale may be a roommate situation, rather than a rental. They "are looking to crash somewhere, to move back in with their parents or a brother or sister, or to move in with a friend," Obrinsky says.

Roommates help homeowners pay mortgage

The trend toward roommates may or may not help homeowners who can't afford their mortgage payments.

"A lot more people are taking in roommates who never would have (done so before). We get calls from people who say, 'I want to rent out a room in my house.' They're looking to supplement their income, so they can pay their mortgage," Verge says.

Other homeowners have opted to rent out their entire home because they've relocated, but can't sell the home for enough money to pay off their debts, which might include a home equity loan or line of credit in addition to a first mortgage. This trend increases the supply of rental housing.

Many cities experienced a boom in conversions of apartments into condos, but now, due to lower condo prices, some builders and owners have opted to rent out units they'd intended to sell. This trend also adds to the supply of rentals.

The rent-it-out strategy doesn't always work that well. A lot of first-time condo buyers are "shocked" and "upset" when they realize their unit can't be rent for enough money to pay the mortgage and other costs of ownership, Verge says.

Rent increases may be modest

Despite these increases in the supply, renters should be prepared for competition in hot markets, Verge warns. Rentals that are priced right are "rented immediately" in markets where demand is high, he says.

Current market conditions might mean only modest rent increases, perhaps approximating the overall rate of inflation this year, however, Obrinsky says. The general feeling among apartment executives at an NMHC conference earlier this year was that if the economy avoided a recession, rent increases would be smaller in 2008 than they were in 2007, he notes.

Tough situation? A rental resume may help

Former homeowners who've experienced a foreclosure or short sale face special challenges in the rental market.

Special challenges for homeowners turned renters

• Landlords typically refuse to rent to people who have poor credit, which can result from a late mortgage payment, short sale, foreclosure or bankruptcy.

• Families who've become accustomed to large homes with multiple bedrooms and bathrooms may not be able to find such spacious living quarters to rent because most apartments and many condominiums are smaller and have only one or two bedrooms.

• Families with pets may not be able to find rental housing where pets are allowed, or may be required to pay an extra deposit or pet rent.

A foreclosure typically can hurt a former homeowner's credit score for a number of years, though the exact duration is a matter of dispute because credit companies don't disclose that information. Foreclosure is among several derogatory items that "are considered quite serious, although older items and items with small amounts will count less than more recent items or those with larger amounts," says a brochure published by Fair Isaac Corp., which generates the FICO credit score.

Renters who need to find an apartment in a competitive market should "put together a nice rental resume" that explains why they experienced a foreclosure or other credit problems, Verge says.

"Show the owner why you want the place and where your job is. Write up the real story because it's going to be tough," he says. "You're really going to have to sell them. Remember, when you are going (to rent an apartment), it's almost like a job interview."

Marcie Giffner - April 14, 2008 - posted at

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Submitted by SadInAmerica on Mon, 04/14/2008 - 1:38pm.