I have enjoyed being a renter over the last five years. I moved several times being a renter, and I never felt anchored or chained to any housing situation. I rarely stressed about paying my rent, and I never once fretted about the decline in the value of my property. Further, I never worried about my prosperity being hindered by some bank refusing to extend me a Ponzi loan. Being a renter has caused me to pass many of my peers on the basis of my net worth — though small, mine is still positive.
Renting is the future of housing. Potential buyers will be sidelined for several more years while they repair their credit and accumulate enough savings to make a down payment. Real estate professionals have already responded by building more apartments, and lately by forming funds to buy REOs and hold them as rentals. Consumers have responded by embracing rental as viable and sustainable alternative to Ponzi borrowing against the ever-increasing values of the homes.
Owning real estate will never lose its luster. Owning — not just renting money to occupy a house and take a long equity position — but truly owning will always have an emotional quality renting simply can’t duplicate. Loan owners have convinced themselves they own, and they obtain a small measure of the emotional satisfaction of ownership, but it’s an illusion. This illusion is fostered by lenders who don’t want the sheeple to strategically default, and it’s maintained by the sheeple themselves who refuse to acknowledge the realities of loan ownership.
If widely embraced by the masses, renting offers the possibility of economic prosperity. If a society has all its wage earners paying over half their gross income to lenders to service the interest on debt, how will these people buy goods and services? More debt? I suppose Americans aren’t broke as long as they never hit their credit limit. Those that try find that Ponzi schemes do ultimately fail.
Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move—and how it will lead to the next boom.
“The Great Gatsby,” the pre-eminent American novel of financial ambition, overextension and downfall, offers a revealing vignette about the great American obsession: real estate. The narrator, Nick Carraway, can’t afford to buy in the rarefied Long Island world inhabited by Gatsby, and by Tom and Daisy Buchanan. But he can afford to rent. … He notes. “I had a view of the water, a partial view of my neighbor’s lawn, and the consoling proximity of millionaires—all for eighty dollars a month.”
Renting in the beach communities is a relative bargain. There is an upward limit to what people will pay for rent. There is no corresponding limit on what people will pay to own a house.
In the American mind, renting has long symbolized striving—striving, that is, well short of achieving.
As Irvine Renter, I don’t share the disdain many homeowners have for those of us who rent our homes. However, I do understand it. I own my cars. Whenever I see a Mercedes or a BMW on the road, I know there is a greater than 80% chance the vehicle is leased. Rather than look up at these luxury car drivers with awe, I look down on them as posers. They haven’t actually achieved wealth, or they would own their cars, and in their striving to look rich, they spend way too much on depreciating assets and make themselves poor. IMO, people who lease luxury cars are status-obsessed fools (see OC Housewives).
But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they’re OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn’t limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.
While downgrading the place of ownership in the American psyche may sound like a traumatic task, the cold, unsentimental fact about the American dream is that Americans never really owned it in the first place.
For the past three decades, especially, consumers haven’t so much bought their quality of life as they’ve borrowed it from banks and credit card companies.
Please see: Money rentership: housing and the new American dream.
And since the Great Recession, Americans have been busy rebuilding their balance sheets and avoiding new financial encumbrances. When American consumers can’t—or won’t—borrow to purchase the goods and services they’ve come to consider part of their standard of living, how does the economy get back on its feet?
It won’t be easy. The California economy is dependent upon Ponzi borrowers.
The answer lies in consumers following the example of corporations—that is, becoming more efficient. The reaction to extended leverage and foolish borrowing isn’t to stop consuming and buying; it is to consume and buy more intelligently. That’s what the Rentership Society is all about. And it starts at home. Literally. Housing is the biggest single component of consumption in the U.S. economy and the source of much of our present misery. According to the Bureau of Labor Statistics, the typical consumer spends about 32% of his or her budget on shelter. In the last decade, that generally meant borrowing a lot of money to take “ownership” of a home.
The vast mortgage-political-financial complex, for a variety of reasons, valued homeownership as a good in its own right. Democrats saw the extension of credit to people on the lower end of the income scale as a matter of social justice; Republicans thought homeownership would make people more bourgeois. Banks and Wall Street firms salivated at the fees mortgages could generate.
So, during the boom, the homeownership rate grew steadily, peaking at a record 69% in 2006, according to the Census Bureau. But those gains were short-lived and came at a truly massive cost: a huge mortgage bust, expensive bailouts of Fannie Mae and Freddie Mac, an overhang of millions of foreclosed properties and falling home prices.
Ownership-boosters failed to note that homes purchased in 2005 and 2006 with no-money-down, interest-only mortgages weren’t really bought. They were simply rented until the “owner” flipped them or walked away from the mortgage. Far from strengthening low-income neighborhoods, this destabilized them through the inevitability of foreclosure.
… It’s tempting to view the rise of rentership as an economic step backward. Renters can’t build up equity, and they have less control over their living standards than owners. Renting is generally seen as something you do when you’ve failed as a homeowner or are not yet ready to be one.
Building equity and controlling your own housing situation are the primary reasons to buy a home — that and saving money versus renting. Unfortunately, with falling prices, homeowners are not building equity, and with general over-indebtedness and the prevalence of toxic financing during the bubble, loan owners have far less control over their living situation than renters. Which group do you think was forced out of their homes in larger numbers over the last five years, loan owners or renters? The old stigma of renting because someone failed as a home owner (loan owner) is less today because so many share this experience. Further, the idea that a renter was not ready to become a loan owner was washed away during the bubble when lenders decided everyone was ready for home loanership if they merely wanted to sign some documents.
But I’d argue the rise of rentership is a sign of a system adapting—albeit too slowly—to new realities.
The U.S. economy needs the dynamism that renting enables as much as—if not more than—it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can’t easily take his skills to where they are needed in North Dakota or Wyoming if he’s underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership.
There has been a long-term trend toward fewer relocations to take new work, but the housing bust has caused labor mobility to drop to record lows.
Home builders and property owners have caught on to the economic opportunity presented by the move toward rental. Fannie Mae and Freddie Mac have become reluctant owners of more than 200,000 properties thanks to the foreclosure crisis, working through the backlog, one painstaking foreclosure sale at a time. But in February, Fannie Mae said it would put up for sale some 2,490 homes as a package, asking for $321 million. The Wall Street Journal reported that an assortment of real estate companies and private-equity investors were considering making bids. The presumption was that these sophisticated investors would turn the homes into rental properties. No less a sage than Warren Buffett told CNBC in February that he’d love to buy “a couple hundred thousand” single-family homes for rentals.
… Consider how quickly the attitude of consumers toward housing has changed. And I’m not just talking about the rising incidence, popularity and acceptance of home and apartment rental. At the height of the boom, people believed their homes generated cash by serving as a source of home equity credit, or by returning profits when they were sold. Today, not so much.
LOL! Despite the obvious devastation caused by the housing crash, kool aid intoxication is still with us. For many in the middle class, real estate is like the lottery. The only hope they have of unlimited spending power is through home ownership and HELOC abuse. If they had to actually work and earn their money, they could never make enough to satisfy their desires. Free money through rapid home price appreciation is the only hope they have for the prosperity they aspire to.
Finally, perhaps, Americans are absorbing a piece of wisdom not from Gatsby, but from Thoreau: “And when the farmer has got his house, he may not be the richer but the poorer for it, and it be the house that has got him.”
We all battle with our desire for entitlements and luxuries. Some people succeed in rising above it, and others do not. I have fought and lost my own battles with the entitlement beast. Last fall, I moved my family into a less expensive rental. As I patted myself on my back for my frugality, my father pointed out I was still renting an upscale home in Woodbury and paying nearly double what I was spending on my two-bedroom apartment several years ago. So much for frugality.
I hope to have more victories than defeats while I balance living for today and saving for tomorrow.
The reason banks don’t want to foreclose on high-end squatters
Many people who own high-end real estate truly believe the housing bust has bypassed them. They’re special. In some ways they are. Despite much higher delinquency rates among loans over $1,000,000, the foreclosure rate is near zero. Banks don’t want to deal with the huge losses they will have to absorb when they foreclose on these properties and sell them. There is no high-end market right now. The bottom of the market has no move-up equity, and few lenders are willing to underwrite such large loans. The loans they do underwrite require borrowers to demonstrate real income. People don’t have it. The total number of houses valued over $1,000,000 greatly exceeds the number of buyers capable of raising that much money. Lenders are praying this changes and somehow the buyers to absorb these properties will materialize. They won’t.
Periodically, we see lenders test this market with a random foreclosure. Whenever they do, the discounts are breathtaking. Consider today’s featured property being offered for 20% off its 2004 purchase price.
Median home price is $395,000. Based on a rental parity value of $516,000, this market is fairly valued.
Monthly payment affordability has been improving over the last 3 month(s). Momentum suggests unchanging affordability.
Resale prices on a $/SF basis increased to $236/SF to $240/SF.
Resale prices have been weak for 12 month(s). Price momentum suggests weak prices over the next three months.
Median rental rates increased $115 last month from $$2,050 to $$2,165.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 4
$1,515,000 …….. Asking Price
$1,900,000 ………. Purchase Price
5/6/2004 ………. Purchase Date
($385,000) ………. Gross Gain (Loss)
($152,000) ………… Commissions and Costs at 8%
($537,000) ………. Net Gain (Loss)
-20.3% ………. Gross Percent Change
-28.3% ………. Net Percent Change
-2.8% ………… Annual Appreciation
Cost of Home Ownership
$1,515,000 …….. Asking Price
$303,000 ………… 20% Down Conventional
4.30% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,212,000 …….. Mortgage
$306,758 ………. Income Requirement
$5,998 ………… Monthly Mortgage Payment
$1,313 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$379 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$235 ………… Homeowners Association Fees
$7,925 ………. Monthly Cash Outlays
($1,371) ………. Tax Savings
($1,655) ………. Equity Hidden in Payment
$471 ………….. Lost Income to Down Payment
$209 ………….. Maintenance and Replacement Reserves
$5,579 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$16,650 ………… Furnishing and Move In at 1% + $1,500
$16,650 ………… Closing Costs at 1% + $1,500
$12,120 ………… Interest Points
$303,000 ………… Down Payment
$348,420 ………. Total Cash Costs
$85,500 ………. Emergency Cash Reserves
$433,920 ………. Total Savings Needed
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
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