It’s easy to get the impression that it’s a great time to be a home buyer right now.
APRs are still quite low, home prices are rising slowly but are still relatively low as well. The National Association of Realtors touts the awesome opportunities every other week in some news release. And generally, when the housing market is low, rents are low to go with them — after all, we have to stay competitive with the cost of a mortgage, right?
An Opaque Market
Well, actually, there’s several fascinating reasons why things aren’t as clear as that these days.
That’s because in recent decades, the APR has been the single largest limiting factor that kept people from getting mortgages. But with the introduction of a few new regulations that went into effect on January of this year, that’s no longer the case.
The ‘Qualified Mortgage’ regulations state that mortgages given to people for whom their mortgage costs will drive their monthly debt load up above 43% of their monthly income are not ‘qualified’ and thus will not receive certain important legal protections that ‘qualified’ mortgages do receive.
In short, that regulation made mortgage companies all over the country warm up their underwriters’ [Denied] stamps — and hundreds of thousands of homes that would have been sold to individuals with ordinary incomes weren’t.
Pair that up with the fact that average mortgage payments rose by 21% in Q4 of 2013 while average wages rose only 2%, and you can see that many families are rapidly getting priced out of the mortgage market by the new rules, even if by traditional credit standards they’re not doing that badly.
(It’s worthy of note that the QM rules are hardly the only factor forming our current market; they’re just one of the least understood and thus worthy of a bit of extra explanation here.)
The ‘Rent Bubble’?
So we have a strange new market where houses are unaffordable not because families can’t afford them, but because the laws don’t allow them to get credit even though they can.
Naturally, every family that can’t get a mortgage has to choose between moving in with Mom — and renting. That, in turn, has driven demand for rentals up — which is presumably one of the background reasons why you’re reading this right now: we’re all in the business of making money, and right now the money is in owning rentals.
But there are already articles being posted about the ‘rent bubble’, and how even the middle class can’t afford rent in some cities. And that’s why the National Mortgage Professional trade journal released a rather grimly-titled article: “American Renters Facing Tough Affordability Issues.”
In other words, the Qualified Mortgage rules have triggered a rise in rental demand, which has triggered a rise in rental prices, which has in turn triggered a financial crisis on the part of many low-income American renters. They’re having to cut back on basics like healthcare and food costs in order to keep up.
According to the report “America’s Rental Housing: Evolving Markets and Needs” by the Harvard Joint Center for Housing Studies, more than half of all US renters currently pay more than 30% of their income in rent — up a massive 12% from just a decade ago. Fully 29% of all renters are paying more than half of their income in rent.
That’s up a jawdropping 50% from 2004, when only 19% of renters were in that condition, and it was already considered “very alarming” by rental trade organizations.
Compounding that problem is the fact that the percentage of Americans that are renting has increased from 31% in 2004 to 36% today. In fact, the last decade has marked the greatest growth in renting households since the Great Depression — and the market has responded. More than three million homes have been switched from being owned-and-occupied to being rented just in the past four years.
What Does This Mean for Us?
A lot of us are here at BiggerPockets because we own and/or manage one or several of those homes.
But it’s not wise of us to stick our heads in the sand and pretend that this is going to last forever. If we don’t understand the market that’s bringing us all of this lovely money, we’re going to get caught off guard when the curtain is pulled back and the Wizard is revealed as a fraud.
Best-case scenario, something changes and there’s a profound rebound in employment and a robust increase in wages coming into tenant’s pockets, turning them into buyers and allowing landlords to cash out.
Worse-case the economy tanks again and real estate prices fall again, this time taking rent prices with them. Sound somewhat familiar? History does repeat itself, the question is have real estate investors been paying attention?
We’re not trying to be doomsayers, here — just the voice of reason. All of these reports and statistics and opinion pieces have been out there for months if not years. We just don’t plan to get caught with our pants down, and neither should you.
How do you think we can plan for the best but prepare for the worst as real estate investors?
Be sure to leave your comments below!