This is a reprint from MONEY TALK NEWSOctober 25, 2013
By Marilyn Lewis
Rents rose 7.6 percent nationally in the last five years, The Wall Street Journal says. In some cities they’re up 10 percent.
Apartment rents (that’s the average rent, excluding perks and freebies) are expected to rise about 16 percent — from $1,049 in 2012 to roughly $1,215 by the end of 2017, Reis Inc. analyst Michael Steinberg tells Money Talks News.
Blame it on the recovery, which is in itself is a good thing, of course. It means, however, that more people are in the market for rentals. At the same time, builders are struggling to bring new apartments online fast enough to meet the increased demand.
“The country has been on a decades-long drought of large-apartment-building construction” because, until recent years, homeownership was growing, writes Slate economic writer Matthew Yglesias.
Investors have been buying up foreclosed homes and renting them out, but even that’s not enough to satisfy the demand for rentals.
“Finding an apartment to rent got even harder in the third quarter, as the U.S. apartment vacancy rate fell to its lowest level in more than a decade,” says Reuters, citing statistics from Reis Inc., a provider of commercial real estate data and services.
More renters in the market
Here’s why the population of renters is growing:
· Foreclosures. The share of Americans who rent a home is at a record high, in large part because of the millions of foreclosures that followed the real estate crash. Since 2006, the first year the U.S. saw more than a million foreclosures, an estimated 21.57 million homes have been foreclosed on, according to this chart at StatisticBrain.
· Recovery. By 2012, 45 percent of 18- to 30-year-olds were living with older family members, says the Atlanta Federal Reserve. Compare that with 39 percent in 1990 and 35 percent in 1980. As the economy recovers, economists expect more workers to find jobs and start entering the competition for rentals.
· Tighter lending standards. Homeownership has dropped to an all-time low after the crash as lenders grew very fussy about whom they’d offer a mortgage. Homeownership rates in the U.S. fell to 65 percent in June, after climbing to a record high of 69 percent in 2005, according to the Census Bureau (see Table 14).
· Rising home prices. Lenders are loosening up their standards a little (but not a lot). But just as it started getting easier to finance a home, prices began rising – skyrocketing in some areas. That’s also pushing more people to rent, The Wall Street Journal says.
· Busted boomers. A growing population of downsizing retirees and empty nesters who’ve lost retirement savings and need to rent is contributing to the demand.
Rents are rising
All of this translates into rising rents. Given the increased competition and tight supply of homes for rent, it’s no surprise that landlords are pushing rents higher.
Reis, which analyzes rents, says the average apartment rent now is $1,073. It rose 1 percent last quarter and 3 percent over a year ago. Not one of the 79 markets tracked by Reis saw rents fall.
In fact, the weak growth in salaries and new jobs has kept rents from rising even higher, Reuters says.
“Landlords would like to raise rents faster, but most tenants simply can’t afford to pay more right now,” Reis senior economist Ryan Severino told CNBC.
In the third quarter, according to Reis:
· Vacancies. The supply of apartments was tightest in New Haven, Conn., and most plentiful in Memphis, Tenn.
· Increases. The nation’s biggest rent hikes – 2.2 percent – pushed the average price paid to $2,043 per month in San Francisco, and $1,686 in San Jose, Calif.
· Highest rents. New Yorkers pay the highest rents in the nation: $3,049 per month on average, an increase of 0.9 percent.
· Lowest rents. The cheapest rentals in the country are in Wichita, Kan., at $529 per month, a 0.8 percent increase.
The future for renters
It’s hard to tell how high rents will go. On one hand, demand is likely to keep growing. According to real estate brokerage Marcus & Millichap:
The oldest echo boomers just turned 28 years old and will create a significant number of households over the next two years. Additional households will form with the arrival of 1.2 million [to] 1.6 million immigrants annually through 2017.
On the other hand, new construction will eventually absorb demand. Rental investors have been slow to respond with new apartments because construction takes a long time from start to finish. Builders must find and buy land and submit to the local permitting process before they can even break ground.
Rents won’t keep rising forever. “‘You just can’t have double-digit rent growth every year or rents would be a million bucks,’ said Bob Faith, founder of Greystar Real Estate Partners, a Charleston, S.C.-based company that owns and operates about 216,000 rental units nationwide,” the Journal says.
Life is complicated for homebuyers these days. There can be lots of competition with other homebuyers — too much, in some cities. And the selection of homes for sale in many cities is skimpy. Add in rising home prices and jumpy interest rates and you’ve got a lot of stress.
If you’re shopping for a home, you don’t need one more headache. And yet, here it is: Banks no longer want to preapprove customers for a home loan.
Preapprovals becoming extinct
MarketWatch looked at data from the Federal Financial Institutions Examinations Council. The report may not include all mortgages but it does include many.
· In 2012, the 25 biggest lenders saw only 29,912 preapprovals become mortgages. That’s just 4 percent of their loans for home purchases.
· In 2007, 101,626 preapprovals became mortgages — 9 percent of purchase loans.
Last year 14 of the 25 top lenders did not have even one preapproval that resulted in a loan. (MarketWatch doesn’t say whether that’s because the banks had stopped making preapprovals or because customers didn’t follow up their preapprovals by purchasing a mortgage.)
MarketWatch offers two reasons why preapprovals are disappearing.
1. Preapprovals weren’t paying off
Home prices fell so fast in the recession that it was hard for appraisers and banks to get a fix on a home’s value.
Lenders hire appraisers to figure out the market value of the home a customer is buying. That’s how banks make sure they aren’t lending more than the home is worth.
But that system developed problems after the crash. Lenders would watch borrowers and sellers agree on a sale price only to have the appraiser decide the home wasn’t worth the price.
Those buyers were left with two choices: Add cash of their own to make the purchase, or forget the deal. Many walked away from the deals and their banks got tired of spending time and money vetting borrowers only to see the deals fizzle out and die with no mortgage sold.
2. Banks don’t need to
Before the recession, lenders used preapprovals to attract would-be borrowers. Banks found that customers who engaged them for a preapproval were likely to stick with them to buy the mortgage.
When the dust cleared after the recession, fewer banks were left standing. Competition for your mortgage loan isn’t what it used to be. Preapprovals take staff time and, with fewer competitors offering preapprovals, banks have lost the incentive.
What it means to you
Why should you care? Because shopping for a home with a bank’s letter of preapproval gives you an edge with sellers. The letter gives you leverage when you’re up against multiple offers, cash buyers, and buyers with big down payments – all common today.
Your preapproval letter tells a seller that you can get financing, and that you are already partly through the process. That’s because, to get preapproved, you had to bring the bank documentation — proof of earnings, tax filings, bank statements, pay stubs, retirement assets and down payment funds – to prove you’re creditworthy. The lender checked your credit score and determined whether you could borrow and, if so, how much.
Your best option now
Now, you’re likely to be offered a “pre-qualification” instead. It’s a much easier process for you. The loan officer calculates how much you can borrow based on your word about your down payment, credit score, income and assets.
The difference between a pre-qualification and preapproval is significant, The New York Times says. Also, according to MarketWatch:
Pre-qualifications are typically based on average mortgage rates rather than the rate that’s close to what the borrower would actually get. Also, most lenders can rescind a pre-qualification, whereas a preapproval is a commitment that usually lasts two to three months.
Here are your remaining choices:
If you can still find a bank willing to preapprove you, it’s a good idea to grab it.
Otherwise, get pre-qualified before you start home shopping. It’s an important tool in learning roughly how much you can spend on a home. Also, it is better than nothing when you’re negotiating with sellers.
Prepare for mortgage shopping as much as a year in advance by improving your credit score, repairing any problems on your credit report, saving for a down payment and gathering the documents you’ll need to apply.
The fact that national parks are closed during the federal government shutdown might inconvenience some travelers, but it doesn’t threaten their livelihoods. But what if your small business relies on tourism near a park?
Several small businesses near Yosemite National Park fear they may have to shut down, NBC Bay Area says. Wildfires, and now the shutdown, have cut deeply into the number of available customers. Dori Jones, owner of a cafe, told the station she lost 75 percent of her business in peak tourism months because of the Rim Fire, and now she has to deal with the shutdown’s impact.
“During the 1995 government shutdown when there was an 80 percent drop in lodging in and around Yosemite, the park lost roughly $300,000 a day, while surrounding communities lost hundreds of thousands more,” the website says.
Even in areas without rampant wildfires, the shutdown could have dire consequences. Bicycle shop owner Fred Pagles, in Springdale, Utah, near Zion National Park, told NBC News his store could last only about a month if the shutdown continues, and he expects to lose several thousand dollars in the process. Another business owner in the area said he expects to lay off several employees in order to survive that long.
It’s not just businesses dependent on national park tourism, either. Some companies that were in the process of seeking government loans are in trouble, The Wall Street Journal says. Even when the government starts back up, there will be a backlog of applications to process — and desperate businesses may have to turn to higher-interest loans in the meantime. Meanwhile, companies that contracted to provide services to the federal government are left with workers sitting on their hands.
A survey of 100 small-business owners shows nearly half of them have already been hurt by the shutdown because of cancellations or reduced business, CNNMoney says. “And if the shutdown drags on, they said it could hurt 20 percent of their business.”
The time for a small business to seek financing is not when they need it and are most desperate, but when their financials are looking the best and they appear not to need funding.
Trevana Properties is a placement company working with a variety of hedge funds, REIT's, commercial banks, specialty boutique lenders, private investors and other funding sources not widely known to the general public.