Four Years into the Real Estate Crisis – What is Driving the New Renter Class?

There are many factors that are driving the new renter class, but it can be broken down into forced pragmatism vs. the American dream.  Here are 5 factors that are driving rentals versus ownership:

1.  Real cost of home ownership: With no home price appreciation prospective buyers analyze all cost of ownership; property taxes, HOA dues, maintenance / repair costs. Notable: property taxes will be under pressure as municipalities look to raise rates to balance stressed budgets. Transaction costs; typically overlooked and take 10% off any arms length transaction – a price of mobility or cashing out.

2.  Demographic effects: Baby boomer households have begun the shift to empty nesters, downsizing, smaller vacation home buyers. Gen Y is growing pressing the need for entry level housing, this is an 80M- group whose job growth was 3x’s the national average in 2010 and the average house- hold size is declining as a % of households. This coupled with the psychological effect of Gen Y’s raised in a housing bust should alter projections.

3. Economic obstacles: Hurdles to purchasing are; real downpayment requirements, stricter FICO and underwriting guidelines. The great recession has leveled many entry level owners with damaged credit profiles and longer term unemployment have drained cash down payments. Rising student loan debt with more college graduates with more debt than previous generations pressure future purchases.

4.  Home Price Declines 30%-50%: Historic declines have altered consumer thinking on housing as an investment. Foreclosure backlog increase fears of further value decreases discourages buyers with down payment risk.

5. Economic drags: Long-term unemployment and labor insecurity raise the need for mobility. Rising gas prices along with environmental issues are increasing demand for residences close to transit and denser locations away from the exurbs.