The hidden, long-term benefit from the housing bust

Thanks to the housing bust, suburban renters now enjoy a much better selection of houses and neighborhoods to suit their family’s needs.

financial-mediaPeople often complain the media focuses too much on doom and gloom. Despite this perception, the financial media is almost entirely focused on providing good news when they have it and feel-good emotional spin when they don’t. When it comes to their investments, people seek out confirming evidence that they made the right choices, so the emotional biases of investors becomes the reporting biases of the financial media.

The housing bust was not good news for homeowners and real estate speculators. Despite the non-stop terrible news and data during the bust the financial media always found a way to soothe its readers with optimistic spin or even complete bullshit (See: NAr reaffirms they have no credibility by reporting false increases in sales). However, in their eagerness to provide a glass-half-full view of the world, they consistently failed to see the real long-term benefits of the housing bust and report on it.

The first and most obvious of these benefits was lower house prices, which are important to stable economic growth. Low house prices are good for the economy because low house prices make for low loan balances and less debt-service. When borrowers have excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments are a direct financial drain.

Do you remember reading any stories about that during the bust?

OCHN-rating-10The benefit of low house prices has been eradicated by the reflation of the housing bubble, but one hidden long-term benefit remains: increased access to high-quality rentals in suburban neighborhoods.

Not everyone wants to own a home, but everyone wants to live in a nice home commensurate with their income level. With the obsession with home ownership pervading American culture, the suburbs often had home ownership rates exceeding 80%. When nearly all the homes in better neighborhoods are owned by their occupants, it provides much less opportunity for those who for a variety of reasons believe that home ownership is not right for them and their family.

rent_not_for_losersIn the past, if someone took a short-term assignment or transfer, if they chose to rent in their new locale, their choices were not savory. Usually, they had to rent an apartment because house rental opportunities were too limited. With the flood of foreclosures that ravaged suburban neighborhoods, the number of high-quality rental homes in suburbia increased significantly. This blunted rental increases in these neighborhoods, which is good for renters and the economy.

In my opinion, that is a good news. Why isn’t the financial media writing feel-good stories about that?

More and More People are Renting. Thank the Suburbs

By Laura Kusisto, Mar 9, 2016

Renting is less and less confined to the high rises of Manhattan or brick-apartment blocks of downtown Chicago and spreading further into the single-family homes of the American suburbs.

Nearly 22 million more people were renting in metropolitan areas around the U.S. in 2014 than in 2006 and much of that increase was driven by the growth in suburban renters….ridiculous-rents

While the renter population in major cities increased by nine million people during that eight-year period, in the surrounding suburban areas it increased by 12 million people.

As downtown areas are becoming less affordable to lower- and middle-income residents, some have them have been pushed to the suburbs, likely accounting for some of the growth in the renter population.

“The story really is that the pressure in the market is growing. It may have started in the cities, but it’s moving further out,” said Laura Bailey, managing vice president of community finance at Capital One.

Actually, this is not the reason. The increase in suburban renting is not a cost-push as this article suggests. Rents have gone up in urban cores mostly because many new luxury apartments were built there. The aggregate number for the market rises due to a change in the mix, not due to rental increases for the individual units in that market.

The median rent in principal cities, adjusted for inflation, grew 5% from 2006 to 2014, compared with 2% for the surrounding suburbs.

In some metro areas the difference was even starker. In Washington, D.C., the median rent in the city, adjusted for inflation, grew by 27% from 2006 to 2014, while in the suburbs it grew by 8%. In New York, the median rent in the city grew by 15%, compared with 4% in the suburbs.


Typically, when there is a dramatic increase in demand for any good or service, the price goes up as a signal to the market to provide more supply. That isn’t what happened with suburban rentals at all. Rental rates for suburban rentals did not rise much even as the number of renters increased dramatically because most of the new demand came from former owners who also provided a unit of supply when they lost their houses to foreclosure.

The housing market witnessed a remarkable transformation from owning to renting from 2008-2012. Resale house prices were severely disrupted, but rental rates were not. When the bust first started rental rates spiked higher due to the timing of demand and supply. The day after a foreclosure, the former owners need a rental, but it may take many months before their former home comes to market as a rental. So after the initial spike, rental increases settled down as the influx of new renters was matched by an influx of new rental supply.


Many suburban homeowners also lost their homes during the foreclosure crisis and often ended up renting single-family homes nearby. In 2014, 37% of renters in the largest metro areas lived in single-family homes, compared with 32% in 2006.

A five percent difference may not sound like much, but given the huge number of homes in the US, this translates to millions of houses.

Overall, a higher proportion of urban residents still rent than suburban residents. Nearly half of residents of central cities in rent compared with 29% of residents of the surrounding suburbs. …

“As demand for renting continues…the suburbs need to make building rental housing easier,” said Ingrid Gould Ellen, faculty director of the NYU Furman Center.

The suburbs, like the rest of California, needs to make building all housing easier.

(See: Root cause of California’s housing problems is homeowner greed and hypocrisy)

Come join us on Thursday

The homebuying season started early this year due to the low mortgage rates. If you or someone you know are considering buying this year, I invite you to come out to our event at JT Schmids on Thursday. We provide free appetizers and drinks and great presentations. I hope to see you there.


RSVP for event here.

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