Jul312015
Is rent-to-own a viable path to home ownership?
Rent-to-own offers the opportunity for homeownership to those with low savings and bad credit, but the path is costly and many don’t make it.
Typical rent-to-own deals are a renter’s path to poverty. For instance, renting furniture often requires the renter to pay many times the actual value of the item, and the only reason anyone enters into these agreements is because they have no savings and no better alternative. This kind of imbalance in the relationship between renter and landlord is ripe for abuse (or profit).
The lure of a rent-to-own deal is the ability to enjoy the house while saving money to buy it. It has the potential to be a major path toward home ownership, assuming the path isn’t so costly that nobody can complete the journey.
In Monday’s post, REO-to-rental companies helped many former owners stay in their homes, I proposed giving the former owners who rent their properties the opportunity to buy it back. Most potential first-time homebuyers today are either young people with too much debt and too little savings or a former owner with bad but recovering credit (probably also low on cash).
Although the minimum down payment is only 3% at the GSEs or 3.5% at the FHA, many people are unable to save this much, often because they spend too much on rent. For those with low savings or poor credit, a rent-to-own deal allows them the joy of the use of their future home while also providing them time to get their financial house in order. The advantages of this relationship are prompting its return.
Rent-to-Own Homes Make a Comeback
Investment firms bank on giving renters an option to buy
By Laura Kusisto, July 28, 2015
Wall Street firms have found a new way to profit from consumers with blemished credit who can’t qualify for a mortgage: let them rent a home first with the option to buy it later.
Rent-to-own programs, once run mainly by small operators, were popular with cash-strapped consumers during the 1990s. They faded a decade later when easy lending made it possible for almost anyone to buy a home with no money down, but with lenders setting a higher bar, they are making a comeback.
For investors, it is a chance to profit off the recovering housing market. Consumers get a chance to lock in a home before they have the money together for a down payment. But the price may be higher rent in the interim and a higher purchase price the longer they wait to move from renting to owning.
This is a good synopsis of why some form of this deal could become very popular over the next ten to twenty years. The Millennials generally have large debts and low savings, so they are out of the home ownership game until their balance sheets improve. A rent-to-own program allows them to secure their family home before they can afford to buy it under terms that won’t imperil themselves or the broader economy.
Here’s how Home Partners’ program works. A consumer teams up with a real-estate agent to select a home in one of Home Partners’ approved communities, which tend to be suburban locations with strong school systems and with homes priced between $100,000 and about $725,000. Home Partners buys the home and leases it to the consumer, who has the right to purchase the home from Home Partners within five years in most places. During the renting years, the consumer is expected to repair his or her credit and save for a down payment, but the longer they rent the more they will pay to acquire the house.
For example, a house shown on Home Partners website has a list price of $449,975 in Chula Vista, Calif. The family that agrees to rent that house from Home Partners has the right to purchase the home for $472,035 after one year and would have to pay $573,762 if it waited five years before purchasing, a markup of 28% from the initial list price.
The monthly rent on the property would start at $2,810 a month and escalate to $3,256 in the fifth year.
For consumers, that likely means that they are paying a premium over renting or buying a typical home. Monthly payments on a 30-year conventional mortgage on the same house would be around $1,800.
The total cost of ownership would be closer to $2,400 after adjustments, but the rent is still $400-$500 higher on a monthly basis than buying. Paying that kind of rent premium on top of an inflated resale value, and the renter is stuck in circumstances where they spend so much on rent to obtain the option to buy that they can’t save for a down payment and close the deal.
Home Partners officials say that the increases are in line with the rapid rise in home prices in markets such as California and rents are typically within 5% to 10% of comparable properties in the market.
This is a feeble justification for what they know is a ridiculous markup. Many of these deals will fail because when the time comes to close the sale, many buyers will see they can get a lot more for their money if they buy something else. Most of these homes will become permanent rentals.
Tiffany Morgan, who works in marketing in Sugarland, Texas, turned to Home Partners 2013 after a divorce destroyed her credit. When she first heard about the program, she thought it was a scam. “I thought no way…it’s some scheme that I’m going to fall into,” said Ms. Morgan, who is in her mid-30s with a 7-year-old son.
Home Partners purchased the home for around $205,000 and she rented it for about a year for $1,730 a month. That same year she improved her credit and bought the house for $215,000. She thought, “What’s the worst case? I’ll lease it for a while and then if I fall in love with it I’ll do what I need to do to make it happen.”
The instinct people have to save what they perceive to be their family home was apparent during the housing bust. Even if the house is worth far less than the bank loan and the “owner” has no equity claim to the premises, people will enter into extremely unfavorable financial arrangements just to “keep their homes.” The rent-to-own model offers profits to investors by taking advantage of the emotional drives of prospective renter-owners.[dfads params=’groups=4&limit=1&orderby=random’]
Whether rent-to-own will prove to be profitable remains to be seen. A number of companies that rent out single-family homes have found that few renters have become buyers, either because they haven’t been able to restore their credit or haven’t been able to save enough for a down payment. But Home Partners said its credit screening targets middle-class and affluent clients who have steady jobs and an overall financial history that makes it likely they will be able to repair their credit and save money for a down payment within a few years.
Realistically, the number of people who travel this route to home ownership will be low.
First, many won’t succeed in repairing their credit, as some people never develop this level of personal responsibility. Those that don’t repair their credit won’t qualify for a loan, and they won’t buy the property.
Second, many won’t save for the down payment. I wrote a post on How to save money for a down payment to buy a house, but many don’t know and won’t learn the tricks to saving large sums. This problem is made worse by the large rental premium rent-to-own buyers are asked to pay.
Despite these problems, this is a viable path to home ownership, and for some people, it may be the only path.
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Home Inventory Down for Fifth Straight Month, Market Even More Competitive
Low inventory in the housing market has increased competition among home shoppers. According to the first quarter Zillow Real Estate Market Report, there were fewer homes for sale in June than one year ago and much of the decline came from the lowest-valued homes sought by first-time homebuyers.
“Historically low mortgage rates continue to keep overall ownership affordability very good by historical standards, making it a great time to buy a home, especially with rent becoming increasingly unaffordable,” said Zillow Chief Economist Stan Humphries. “Finding a house is the last hurdle for many buyers who have saved a down payment and gotten pre-approved for a mortgage. But low inventory levels like those we’re seeing across the country can bring the home-buying process to a screeching halt. In many markets, there just isn’t a lot to choose from in terms of homes on the market.”
Charlotte (-39.7 percent), San Antonio (-31.3 percent), and San Diego (-30.0 percent) experienced biggest decreases in supply of for-sale homes.
Laguna Beach estate once among the priciest U.S. foreclosures – $19.2 million – finds a buyer
An 11,000-square-foot home set high in the South Laguna Beach hills has made a few headlines since it was built in 2010.
The estate was foreclosed at $19.2 million shortly after construction was completed. Realtor.com called it one of the priciest residential foreclosures in the country.
A couple of years later, the home at 31401 Mar Vista Avenue became the setting for the Philharmonic House of Design, a month-long fundraiser showcasing the work of nearly two dozen interior designers.
The house, reached by a private drive and set on a dozen acres, has never been lived in, according to listing agent, Michael Johnson of Villa Real Estate, who gave us a tour last year. At that time, it was on the market at $14.4 million.
It went into escrow on July 15.
The most recent asking price: $12.8 million.
We’ll watch for the sale price.
Politicians lack courage to eliminate HMID
WASHINGTON – Republican presidential candidates are pushing a simpler, cheaper tax system.
“We should make it so that for the majority of Americans, it should take 15 minutes to do your taxes – not days, weeks or months,” New Jersey Gov. Chris Christie has said.
Another candidate, Sen. Ted Cruz, R-Texas, has called for a tax code “that would allow every American to fill out his or her taxes on a postcard.”
It’s easier said than done. A truly simpler, more efficient tax code would be one without any, or least many, tax breaks, economists say. The problem is that there’s rarely agreement on which tax breaks are necessary and which aren’t.
The mortgage interest deduction, which many economists say is among the biggest and most problematic in the tax code, offers an interesting case study of how difficult it can be to deliver on the promise of a simpler tax system.
The federal government gives a tax break to families that pay interest on a residential mortgage. It costs Uncle Sam $69 billion a year, and almost all of that money goes to households with at least $100,000 in annual income, according to the congressional Joint Committee on Taxation.
Many economists agree the deduction mainly serves to encourage more affluent Americans to buy bigger homes. Yet the deduction has proved appealing. Even Sen. Rand Paul’s, R-Ky., radically simple tax plan maintains this deduction, even though Paul would eliminate almost all of the other quirks in the system.
Eliminate all deductions, exceptions, exemptions and credits, while reducing rates accordingly, but don’t justify eliminating the HMID by telling me that “almost all of the benefit goes to $100K+ households.” This is a stupid argument.
The median US household income is ~$50K. The Federal Income Tax Code is structured such that half of all US households pay no federal income tax, or pay a negative amount. Therefore, by design, household income needs to significantly exceed $50K before deductions, including HMID, begin providing an appreciable benefit.
In other words, if our best argument for eliminating the HMID is that it only benefits $100K+ households, then we could adjust the tax code to ensure the HMID provides a benefit to $50K households. We could do this by dramatically increasing the federal income tax burden on these households, thereby allowing each to benefit from the HMID.
There is another alternative: providing tax credits. A direct credit is available to anyone regardless of whether or not they itemize. If you made the HMID a tax credit with a cap at some low number like $5,000 per year, the credit would be available to anyone, but it would only be a significant help to lower and middle income borrowers.
If someone proposes this, they must skip all of the complaints about the tax code being too complicated though.
Yes. With deductions and credits comes complexity. It makes the math harder and it makes evaluating qualifications more cumbersome.
Housing in Britain: How much the young suffer
Britain faces same issues as California
BRITONS are obsessed with home-ownership; but it is getting less and less common. A new note from Neal Hudson of Savills, an estate agent, points out that “the share of households owning their home peaked in 2003 at 71% […] and has been in decline since.” But the crucial point, as Mr Hudson goes on to explain, is that things look rather different when splitting up the data by age group. The chart uses data from the Council of Mortgage Lenders and shows Britain’s home-ownership by age. Even seasoned watchers of Britain’s housing market are surprised by how dramatic it is.
The pathetic rates of home-ownership among young people in Britain may be down to the country’s crazy property prices, particularly in London where lots of young people live. (The economic problems associated with London’s housing market are explained in this week’s issue). And other factors, not related to prices, may be at play. More young Britons are spending a long time at university, driving up the age they get their first job. And younger generations are more likely to move around to find work than the old; renting gives them the flexibility to do this.
California realtors talk up the market
Survey: Housing market returning back to normal
VICTORVILLE —The California Association of Realtors said an improving economy and job growth is drawing buyers back to the housing market.
According to the association, home buyers have started forming households again, with buyers who previously experienced a foreclosure or short sale jumping back into housing market, according to the organization’s “2015 Survey of California Home Buyers.”
Becky Otwell, president of the High Desert Association of Realtors, said the state survey reflects much of what the local association is witnessing in the Victor Valley.
“It’s been a long time coming, but we’re seeing people getting back into the housing ballgame,” Otwell said. “People are taking advantage of the improving economy and low interest rates. It looks like we’re going to have a great summer.”
“I think the millennials are getting jobs and are tired of renting,” Otwell said. “We’re not see seeing a massive wave of millennials, but they are coming out of hiding.”
The California Association said with distressed sales at record lows, the Golden State is returning to a “more normal housing market.”
From the beginning I said these loans would be can-kicked, and they have.
What home equity bomb?
Though Wall Street and credit industry analysts had warned of serious losses when hordes of housing-bubble borrowers hit the 10-year mark, beginning this year, the delinquency rates on these billions of dollars in equity lines are actually declining, not rising.
WASHINGTON — It’s the emerging housing success story that almost nobody knows about: Hundreds of thousands of homeowners who took out record numbers of home equity lines of credit during the boom years of 2005-2008 are defying experts’ predictions of financial catastrophe.
How? By paying their debts. Rather than defaulting on their credit lines at the 10-year “end-of-draw” point when their required payments can abruptly jump by hundreds of dollars a month, the vast majority of owners are hanging in there, finding ways to stay current, often with the help of the banks who lent them the money.
Though Wall Street and credit industry analysts had warned of serious losses when hordes of housing-bubble borrowers hit the 10-year mark, beginning this year, the delinquency rates on these billions of dollars in equity lines are actually declining, not rising.
Here’s why. Between 2005 and 2008, banks extended an unprecedented $265 billion of equity credit lines to American homeowners, according to credit data company Experian. It was all part of the be-happy-don’t-worry days when home values were soaring and hocking your house to pull out cash was all the rage.
By contrast, during the preboom years of 2001 and 2003, banks extended around $60 billion in credit lines. Not only were the boom-time lines massively larger in volume, but the average balance of individual lines went supersized, too — into the low $70,000 range.
Most of the boom-era home equity lines — popularly known as HELOCs — featured 10-year initial draw periods, during which only interest needed to be repaid. After the initial period, the lines transformed into fully amortizing loans — interest plus principal — with higher monthly payments.
As the boom devolved into bust and global recession, millions of owners found themselves with minimal or negative equity, and simultaneously were hit with job losses and declining household incomes. To banking and credit analysts, the hundreds of billions of outstanding home equity lines began to look like a giant ticking time bomb. It seemed inevitable that by 2015, economically challenged owners would face payment shocks and the default rate would climb over the coming several years through 2018.
Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, called the approaching deadlines a potential “wave of disaster” for banks and consumers. Fitch Ratings Ltd., the Wall Street bond ratings agency, issued warnings about the “increasing credit risk” to the banking system posed by the upcoming credit line payment increases. One real estate data firm foresaw the situation as a looming “HELOC hell.”
So what’s happened with HELOCs? So far, nothing close to what was forecast.
Last week the American Bankers Association released its first-quarter 2015 statistical report on consumer credit performance. Home equity credit lines dropped to their lowest delinquency level in nearly seven years, with just 1.42 percent of borrowers behind on payments.
Bank of America, one of the biggest players in the home equity field, said “early stage delinquencies” on HELOCs are around 2 percent.
TD Bank, another major lender, declined to provide me a number but confirmed that there is no surge underway in end-of-draw delinquencies.
What’s going on? It appears to be a combination of factors:
•The $5 trillion-plus increase in homeowners’ equity wealth during the past four years alone has improved their financial positions significantly.
•Aggressive outreach campaigns by the biggest banks to alert borrowers to upcoming payment changes and to offer them a variety of options — from refinancing to term extensions and restructurings — have been extraordinarily successful in keeping delinquencies low.
•And, finally, the broad improvements in the national economy overall — lower unemployment and at least modest growth in wages — have made it easier for many borrowers to pay off their HELOC debts, afford the higher payments, and refinance or restructure credit lines with their banks.
Adam Block, a home equity outreach executive for Bank of America, told me that thanks to a confluence of positive economic factors and a strong outreach campaign, “customers in general have been very focused on repaying their debt” — and that accounts a lot for low delinquencies.
Bottom line: If you’ve got a HELOC scheduled to hit the 10-year mark in the next year or two, make sure you know what the higher payments will be and the range of options you may have to handle them. And if your bank hasn’t reached out to you yet, reach out to your bank.
YoY 2yr yld MA action signaling rate hike dead ahead being priced-in
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10yr validating…
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LOL the rates have been way higher under ZIRP but nice try
FAIL!
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Cheers!
If these bond investors are wrong, and if they are selling prematurely, we may get one more rally in the bond market when Yellen doesn’t raise rates in September.
[…] mortgage rules, and they succeeded. VA loans don’t need a down payment, and occasionally rent-to-own programs pop up that allow buyers a path to ownership without a down payment, so while down payments are not […]