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Impact of the Imminent Failure of Freddie Mac and Fannie Mae and the Decline in Availability of Rental Properties on Apartment Building Investors

by Ted Karsch on August 26, 2008 · 3 comments

  

The imminent failure of both Freddie Mac and Fannie Mae has already begun to have a detrimental impact on the larger US economy and the ability of home buyers to finance the purchase of a new home.

This is an unfortunate circumstance for many young families who may not be able to qualify for a mortgage to purchase their new home because of tighter bank underwriting guidelines. While this is a negative situation for young families looking for their own homes it could be a potential wind fall for the owners and operators of apartment building complexes across the United States. All of the people displaced by the housing bubble along with new populations of young people looking for housing will have to turn to rental properties for housing. The fact that more and more residential, single family homes are entering into foreclosure should also further diminish the available supply of rental units on the market.

When a home is in foreclosure or bank owned it can’t be rented and it sits as an empty, unavailable property. For example, on the residential street where I live in Fort Lauderdale there are 3 or 4 houses on one block that appear to be completely abandoned and in some stage of foreclosure or bank ownership. No one can rent these homes because they are bank owned and waiting for a buyer. Meanwhile the prices of homes in the neighborhood are still priced well above the ability for most working families to afford, especially considering the difficulty many are experiencing when searching for an affordable mortgage.

The obvious choice for many young families and those displaced from their homes because of foreclosure is to find a rental property to live in while saving money for the future purchase of a single family home. With the expected decline in available rental homes available on the market due to bank ownership many families and young people will be looking to apartment buildings for housing. This increase in the number of potential renters comes just at a time when the construction of multi-family buildings has begun to decline.

The decline in the construction of new apartment buildings is due to the fact that many banks and real estate financiers are cutting back on new construction projects nationwide. They are unwilling to take the risk of funding new construction during a time when residential real estate prices are dropping rapidly. According to the Associated Press, the “Standard & Poor’s/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.”

It remains to be seen what impact the decline in availability of rental properties will have on the rental rates for major metropolitan areas.

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{ 3 comments… read them below or add one }

Tammy August 26, 2008 at 12:51 pm

Here in Myrtle Beach, we’re having problems getting solid buyers qualified. That, and dealing mostly with short sales and foreclosures, makes this a depressing time. Hopefully, we’ll pull out of it soon.

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Jessica Beganski August 28, 2008 at 11:33 am

I think you’re right on the money. I think investors with apartments are going to be doing well as the rental market gets more competitive.

Because of this, I’m starting to recommend to certain seller clients that they rent their houses rather than try to sell them now. If they don’t have a large mortgage and are looking to retire, for example, the rental income can make it worth the while.

Jessica Beganski

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No Name September 2, 2008 at 8:33 pm

I would differ slightly with your assessment as-to why lenders (like my firm, for example) are not funding new multi-family construction. I can assure you it is not because they are unwilling to take the risks. It is because they are desperately undercapitalized and have no secondary mortgage bond market to sell the loans into.

Banks would love to be originating and closing more loans, but they can’t lend out their last dime. Until the CMBS (commercial mortgage backed security) market starts printing some real volume, lenders will hold onto their cash.

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