Original Source: Renters Key To The Housing Recovery

When economies fall on hard times, people start thinking more short term, and they struggle to live day to day. Today’s economy definitely fits into this category. Because people are trying to live day to day and are looking more short term, the housing market is in a shift.

Previous homeowners are losing their homes through foreclosure and job loss. People are leaving their underwater homes through strategic defaults to start over. These previous homeowners are in need of housing. Some will live with family, but most are looking to rent a home.

Obviously the more people looking to rent, demand goes up, and rental prices will rise. As rental prices rise, if home prices are still falling, the housing market will recover. How? Let me explain:

What Happens When Renting Becomes More Expensive And Home Prices Fall?

As home prices continue to fall, as long as rental demand goes up, you will see a truly stable market come into fruition. People will always need housing and if it becomes more expensive to rent a home then buy, people will make the necessary sacrifices to buy a home over rent.

According to Yale economist Robert Schiller:

“If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure.” – Money.CNN.com

Economist’s know that if you follow rental trends you can guage housing trends. As the price of renting drops, more people will choose rent over purchase. As rental prices increase, more people will find value in owning.

Lending Standards Forcing More People To Rent Is A Good Thing

As lending standards continue to grow more stringent, people without money to put down on a home will be left to rent. This is a good thing, for the housing market anyways, not so much for the renter.

If you talk to anyone looking to find a home for rent today, ask them if they are getting everything they wanted. Is the location right? Is the price right? Are they happy with the landlords conditions? How many rentals did you miss out on due to high demand before you found a property to rent? Why are you renting over buying?

That last question is usually answered with a problem to obtain financing to own a home.  Sure, some people rent for other reasons, but a large majority would prefer to own a home over rent.

More People Looking At Lease Options Show A Slow Rental Market

Over my 9 years in real estate, I have had one lease option close. The lessor actually went through with the terms of the contract and bought the home. Most times this is just not the case.

People interested in lease options can’t afford to buy a home, have little or no credit, or need to work on bad credit to purchase.  When I think of lease options, I think of a renter that isn’t satisfied with the rental market, otherwise they would just rent until they could buy a home.

We have a property management company within our real estate brokerage. They have no inventory to rent. All rentals are secured with 100% occupancy and everyday we get more and more inquiries for rental properties and we have to turn them away due to lack of inventory.

This proves, at lease in my area, the housing market is on the road to recovery.  Why? Investors.

Investors Are The Key To The Housing Market Correction

There is no question that inventory levels in housing markets across the nation are at astronomical levels. Sure, some markets are doing pretty good, but most housing markets are saturated.

High inventory = Less demand = Lower prices

Usually, when home prices drop, rental prices drop. Owning a home becomes more affordable, and rental owners have to drop their prices to keep their investments occupied. Today’s market is different.

Renting is becoming more expensive due to credit becoming harder to obtain, people walking away from homeownership through strategic defaults, and decreased rental inventory.

It’s a good time to be an investor, don’t you think?

According to Robert Schiller, the Yale economist, the normal costs of rent to own ratio is 87%. Which means, people will be more willing to pay for housing if it only costs 13% more to own a home.

During the bubble,  americans were paying 66% more to own than rent.  This number is still incredibly high, which means, rental properties are in high demand.  With homes becoming more affordable, and rental demand on the rise;. investors that plan on renting out properties should be salivating.

The smart investor is watching this trend closely. If investors start buying up properties for rentals, inventory will decrease. And through rental demand, the housing market will start to show a true recovery.

In order for the housing market to recover, plain and simple, we need more renters to entice investors to spend more money.