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Lack of Supply Haunts the Housing Markets

Pursuant to our last post, and as a lead up to our next EBook, today we wanted to talk about the big, not so subtle elephant in the housing market: a lack of supply. According to Zillow, the lack of new supply is squeezing renters and buyers by keeping housing costs high. In fact, U.S. renters can expect to spend 30.1 percent of their income on rent, while home buyers can expect to spend about 15.3 percent of their monthly income on a mortgage payment.

To make sense of this study, we interview Mike Canning, our real estate guru:

  1. Are you surprised with the results of the study?

I was surprised to see so many cities where a renter is paying more than double the percentage of their income on housing than that of homeowners.

There are a number of traditional reasons why a person opts to rent, rather than purchase a home. For example, if their life is in transition (just out of school, going through a divorce, etc.); if they don’t have any savings; if their credit is pHousing Market Trendsoor; or even if they just don’t want to deal with the headaches of maintenance and landscaping that come with owning a home.

But, also, the housing market crash that began in 2008 left lenders and the public wary about home ownership – and that still lingers today.  From a lender’s perspective, lending rules were drastically tightened after the crash and the investment trusts that funded lending all but disappeared. Those trusts are now just returning. From a consumer’s perspective, the fear of another bubble and crash is enough to cause hesitation.  Bad personal experiences and sensational stories about incredible drops in value and record numbers of foreclosures have really caused the public to be skeptical about the benefits of home ownership.

  1. What’s up with the lack of supply?

This is a vicious circle. When the housing market was hot in these area, consumers were leveraging more of their income to keep pace with the market.  Then, sub-prime and non-conforming loans were used because, without them, buyers would not qualify for inflated pricing.  These programs are no longer available.  Therefore, even if all the skittish consumers were in the market to buy today, yesterday’s prices still couldn’t be sustained.   In these markets, homeowners are “landlocked.”  They may be able to afford to keep paying the mortgage on their home, but until the market can sustain a price that is at least close to what they owe, they will not sell.  So, what appears to be home appreciation is really bidding wars between fewer buyers on limited inventory.  We used to refer to the housing economy as a “buyer’s” or “seller’s market.”  Today, it is a “seller (with equity) looking to buy” market.  In other words, if you are in a position where you can sell, there may be limited options to pick from.  However, you will be bidding at today’s value and interest rate, as opposed to that of 2007.

  1. Will it get better?

Yes, but this is a long term correction and it will take a couple of years.  As lenders learn to work within their new boundaries, and as renters realize they could pocket half of their housing costs by buying in a more stable housing market, we will see improvement all around.

  1. About those renters – what can they do?

If your circumstances dictate you must rent, there are a few things you can do to improve your odds:

  • In addition to scouring the traditional classifieds and apartment guides, there are a number of online sites with up to date information.  You have to be careful with private owners, and you might want to seek a legal review of their leasing terms.
  • Don’t start smoking or go buy a new pet.  It makes sense that landlords in a tight market can set strict terms.  So, the more objections you can avoid, the better your chances.
  • Be flexible in terms.  Longer leases are typically more appealing to landlords, less moving wear and tear and less continually looking for new tenants. If the owner’s long term goal is to sell the property, agree to cooperate in the showing process.  Although this might be a pain, it might get the lease done.
  1. And home buyers?

Home buyers should work closely with a reputable lender to get the pre-approval process underway.  In a tight market with limited options, it is the buyer who is best able to show they will have little complications settling that will stand out front.

This is part II of a three part series on the state of the U.S. housing market. Stay tuned next week for our full, 34-page EBook providing further coverage.

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VP of Business Development Northeast Region


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