The Next Affordability Pinch

photo credit: Payton Chung

Yesterday’s home sales figures from the National Association of Realtors remind us that despite reasons for optimism, the market is not quite out of the woods. It’s important to note that the 2.6 percent slide (compared to March) is for home sales.  Continuing a multi-year trend, rental vacancy is still going down.  In short, many people who previously would have been potential homeowners are renting.  This is a big deal for affordability.  Bear with me here…

Why rent (demand-side)?  According to Laurie Goodman of Amherst Securities, if you didn’t make payments on a mortgage for 90 days, your credit rating (FICO score) was ruined.  Home loan standards are much higher now, in stark contrast to the “if you have a pulse, you qualify” system of the mid-2000s.  Thus, homeownership is out of reach for many who are unemployed or lost homes in foreclosure.  These people have to live somewhere, so they rent.

Why rent (supply-side)?  With home prices down and not necessarily expected to rise in every market, buying a home might seem like a riskier financial decision than in previous generations.  If you’re an investor, you see the decreasing rental vacancy and see an investment opportunity.  This also motivates new building of rental units.

…and the Affordability Pinch?  In built areas, the “higher-and-better” use of many properties will be rental units.  Based on the demand, as developers renovate residential spaces they will create rental (versus owner) opportunities.  It’s unlikely these new units will be affordable (except in localities where it’s required by law).

We have millions of households unable to leverage credit (due to foreclosure), with renting as their only option.  Urban reinvestment and redevelopment could serve as a significant push out of city neighborhoods for lower-income renters.  This is hardly a new phenomenon.

This time is unique because we aren’t just talking about a particular gentrifying neighborhood or street.  This pressure is widespread, having to do with deep-rooted market factors, like credit supply, consumer preferences, and opportunity for investment.  I think this could change the face of urban housing markets.

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