Housing Seesaw: Homeownership vs. Rentership

by Nam Ngo

The end to summer 2012 saw some promising signs in the housing market. CoreLogic’s database show year-over-year home prices increased 4.3% in July 2012 compared to July 2011. The month-over-month increase was also a positive sign at 1.3% from June 2012 to July 2012. These are some of the biggest percentage increases since the summer of 2006.

Home prices rise due to external factors: low inventory + investor demand.

Positive news in price increases has brought 600,000 homeowners out of negative equity in the second quarter, up to a total of 1.3million for this year. This is good news, but given the 10million+ homeowners who are still upside down, it appears that a full housing mend will remain elusive for the forseeable future.

John Burns Real Estate Consulting reports that the percentage of investor purchases in home sales have grown significantly beginning this year. Reports show that up to 30% of total sales are purchased by investors. What this tells us about the current appreciation in home prices is that the recovery is partially driven by investor demand on one side and low inventory on the other.

Rent prices are also rising rapidly, but will growth will subside.

At the other end of the housing spectrum, we’ve seen record increases in price of rents this summer. A surge of demand for rentals results in lower vacancy rates and higher rent prices. The annualized rent increase is almost 5% nationwide and over 10% in the hottest rent markets like San Francisco, Denver, Raleigh, Houston, and Boston. These high rental increases are very likely to quickly subside as newly constructed rentals enter the market.

Will more households choose affordable homeownership over rentals?

This is probably one of the most pertinent questions in the current housing market. The balance between rentership and homeownership has seen recent movements towards renter ship, but there is the lingering critique that rental demand will subside in favor of affordable homeownership. The new QE3 MBS policy by the fed will also provide liquidity and lower mortgage rates to make housing more affordable. Will further increases to affordability sway renters to buy a home? In short, the answer is No.

The aggregate shift to rentals has much more to do than a financial alternative to homeownership. For some ex homeowners, the desire to own a home has been crushed or severely subdued after the mortgage crisis and that sentiment will take more than a few years to repair. Then there are homeowners who have recently been flipped upside down and want to sell their homes and rent, but this segment is admittedly small. In conclusion, low mortgage rates and housing affordability will not drive up homeownership rates alone because a shaky labor market and pending foreclosures; renters are here to stay.