Renters are Beginning to be Affected by Depressed Housing Market
Homeowners and investors aren't the only people to have been adversely affected by the 2008 housing crash. Although renters thought that they would be immune because they don't have a mortgage, many of them got an unpleasant surprise when they discovered there were other ways the housing crash could affect tenants. This was a particularly unpleasant discovery for people who'd decided to rent rather than buy in order to get in a more stable economic position before taking on mortgage debt.
One of the most common problems is the landlord's mortgage on the property. During the housing boom, single-family homes weren't the only kind of real estate to attract the interest of investors and have prices distorted by speculation. If anything, commercial properties such as apartment buildings, office buildings, and retail outlets were considered even more desirable because they could provide ongoing rental income while the investor was finding a buyer. As a result, many apartment buildings were owned by people with substantial mortgages, sometimes of the riskiest types, on the assumption that the property would sell before the mortgage became problematical. If the landlord is not able to make their monthly mortgage payments due to rising interest rates and adjustable rate mortgages, the rental property could very well go into foreclosure.
When that happens, renters could find themselves facing eviction. In the worst cases, they received no advance notice. Some tenants who had faithfully paid their rent each month came home from work one day to discover that all their possessions had been put in the street while they were gone and the locks changed. Such abuses led many jurisdictions to place restrictions on the ability to evict tenants who had paid their rent in good faith, requiring a reasonable minimum advance notice.
But even thirty or ninety days' notice can be a shock. Suddenly a person who has been in an apartment for years is having to scramble to find a new place to live and a means to move their possessions to the new location. Worse, many people simply don't have the spare cash on hand to come up with the deposit and first and last month's rent on a new apartment on so little notice. As a result, many people ended up having to put their possessions in storage and move into transient accommodations while trying to pull together the necessary funds, with the Catch-22 that long-term-rental hotel suites and the like are often more expensive per unit time than a regular apartment, for much less square footage and far inferior kitchen facilities (which further strains the budget because it's more difficult to use various tricks of economizing on food, such as buying in bulk and cooking large pots of soup to eat over the course of several days or weeks).
In other cases renters have gotten clobbered by rapidly rising rental prices. This has been particularly hard on people who rent from month to month, without a fixed-term lease. Often they would come in to pay their month's rent and be informed that next month it would go up tens or hundreds of dollars. Rents that had previously fit comfortably in the budget now became unmanageable, forcing tenants to move. Having a long-term lease was often only a temporary reprieve, and when it came time to sign a new lease, it was under much less favorable terms to the renter.
A number of factors have contributed to the rising rate of rental prices. One of the reasons that rents are rising in these locations is the fact that developers have not been able to construct as many new apartment buildings. Often this is the result of restrictive zoning laws, or rent control laws making it uneconomical to create new rental units, but in some places there simply hasn't been land available to build on. In our largest cities this has resulted in a large demand with little supply. When supply is not able to keep up with the demand, it results in rising prices. To make matters worse, rapidly increasing numbers of former homeowners are becoming renters, whether because they had to move and sell their home at such a loss that they can't buy in their new location, or because they lost their homes altogether to foreclosure. They have to live somewhere, and renting is often the only viable option for these individuals and families, causing demand for rental properties to go up even more.
Another important factor in rising rental prices is more and more renters waiting for the prices of homes to drop before they make the decision to purchase. Many renters who have sufficient funds to make an adequate downpayment are assuming that home prices have not yet hit the bottom. Particularly in some areas that were grossly inflated by speculation, there is reason to believe that housing prices still haven't gotten back down to the fundamentals of the market. For these renters, it doesn't make sense to buy right now. They don't want to risk getting trapped in an underwater mortgage if another financial contraction results in further tumbles in home prices.
There is also the fact that even buyers who would be willing to buy right now are unable to do so because of growing difficulty in qualifying for affordable mortgages. Following the collapse of the subprime market, many lenders have tightened restrictions and now requesting not only good credit but excellent credit. Requirements for larger down payments have also increased, making it increasingly difficult for first-time home buyers to realize their dreams of home ownership. Lenders have also tightened requirements for income documentation, which makes it difficult for self-employed individuals and those working on commission or other forms of irregular income to qualify for a mortgage. As a result, these people are stuck renting for the foreseeable future, leaving them competing with everyone else in a tight rental market.
Because rentals are rising so rapidly, economic analysts are becoming concerned that rental properties could become the basis for another bubble. Rents can't keep rising indefinitely, and if speculation based upon investors trying to resell properties drives rents beyond what the market will pay, the bubble will implode, just like every other bubble. But a sudden hard market contraction in the rental market leaves the door open for harm to many innocent tenants who rented in good faith and are suddenly stuck being pushed out of a foreclosed-upon building and struggling to find a home when a significant part of the rental market is in limbo because banks are having trouble finding buyers for their rental properties.
Share this
