What a difference five years can make. Since the housing bust battered the psyche of potential home buyers around the world, it doesn’t appear things are over yet. The country has tallied up 4.4 million foreclosures since January 2006, according to RealtyTrac, an Irvine, Calif.–based company that publishes a database of foreclosure, auction, and bank-owned homes; seen unemployment cross the 10 percent mark (it’s currently at 8.6 percent); and watched home prices steeply decline, sometimes falling as much as 65 percent to 70 percent in hard-hit metros. The result is a collective push into rentals for millions of Americans. But how long will this economy-driven shift from owning to renting last?
“We’re all trying to figure out when the market will truly settle,” says Doug Bibby, president of the National Multi Housing Council, a Washington, D.C.–based trade association representing the rental housing industry. “In some markets, we’re seeing signs that housing prices may have stabilized.”
Once consumers feel that stabilization has occurred, jittery renters could be encouraged to at least go to their banks and talk about a home loan (though getting the bank to lend will be a bigger hurdle—see “Lending Environment,” on page 35). “People are wondering if we have seen the bottom of the downward pricing spiral in housing,” says Ryan Severino, an economist for New York–based research firm Reis. “It’s one of those things that persists until it doesn’t anymore. If the perception exists that it could persist, people stay away. They say, ‘Why would I buy a house today that’s going to be worth 10 percent less in six months?’?”
Unfortunately, until foreclosures stop, price depreciation will continue—both real and imagined. Celia Chen, a senior director specializing in housing economics research at New York–based Moody’s Analytics, says there are 3.8 million people who are in late-stage delinquency or already in the foreclosure process.
Until that settles down, home sales numbers won’t pick up appreciably. “Why do you want to go out and buy a house if it’s going to go down in value?” asks Ric Campo, CEO of Houston-based REIT Camden Property Trust, an apartment owner with 68,979 units nationally. “Every time you pick up the paper, they talk about foreclosure rates, excess houses out there, and prices going down. That will keep people in multifamily housing longer because it’s going to take time for the consumer to have confidence that home prices are going up.”
Of course, home prices mean nothing if you can’t access capital to buy a home. And you need a job to qualify for a home loan. Even with some optimism in November’s unemployment numbers, which fell 0.4 percent from the month before, showing that the economy added 120,000 jobs in November, things need to improve significantly before consumers rush to buy a home. Many lack both the confidence and the savings to buy a house right now. “If [the banks] remain conservative—meaning you need real assets and you have to put a real amount down—it will still be a struggle for households because you haven’t seen the income growth,” Bibby says.
As David Crowe, chief economist and senior vice president at the National Association of Home Builders (NAHB) points out, even if someone has a job, they’re not likely to take on the commitment of homeownership, and this also boosts rental numbers. That same phenomenon can occur when there’s a hiccup in the economy, such as with August’s debt ceiling crisis standoff and the ensuing Standard & Poor’s downgrade.
“Every time people started getting interested in buying again, something happened,” Moody’s Chen says. “The recovery has been so weak that every negative incident sends consumer confidence back down and makes people delay purchasing a home again. Housing moves with business cycles. When the economy is stronger, housing demand is stronger. When there’s a recession, housing demand weakens.”
Ultimately, everything comes down to jobs—if consumers are confident they’ll have work and start forming households, eventually they’ll buy homes, stopping the price declines and stemming the foreclosure tide that has overwhelmed the economy. “Our expectation is that the economic recovery will gather steam over the next year,” Chen says. “By the end of this year, we will generate quite a few more households and will stabilize house prices.”