Weekend Reading: Renter Nation

Authored by Lance Roberts via RealInvestmentAdvice.com,

“The psychological factors are harder to assess. People aren’t flipping condos for sport the way they were during the bubble when mortgages were available to anyone regardless of whether they had income or assets. Yet it seems there’s a widespread desire to own assets – stocks, bonds, and real estate – regardless of price. It’s not an obviously happy mania, where people are motivated by promises of great wealth. It’s more like a need to be an asset owner in an economy that continues to hurt workers without college degrees and becomes more automated. Nevertheless, the price insensitivity of many buyers is enough to cause concern.” – John Coumarianos

It is an interesting comment and John is correct. Low rates, weak economic growth, cheap and available credit, and a need for income has inflated the third bubble of this century.

But when it comes to housing, as I was digging through the employment data yesterday, I stumbled across the “rental income” component which is included in national compensation. When I broke the data out into its own chart, I was a bit surprised.

Let’s step back for a moment to build a bit of a framework first. While there has been much speculation about a resurgent “housing boom” in the economy, the data suggests something very different which is that housing has simply become an asset class for wealthy investors to turn into rentals.

As the “Buy-to-Rent” game drives prices of homes higher, it reduces inventory and increases rental rates. This in turn prices out “first-time home buyers” who would become longer-term homeowners, hence levels of homeownership rates first seen in the 1970’s. (Also, note surging debt levels are supporting higher homeownership.)

The chart below shows the number of homes that are renter-occupied versus the seasonally adjusted homeownership rate. As noted above, with owner-occupied housing at the lowest levels since the 1970’s, “renters”have become the norm. 

The surge in “renters” since the financial crisis, due to a variety of financial reasons, has pushed rental income to record levels of nearly $800 billion a year. Given the sharp surge in incomes, it is not surprising that multifamily home construction and “buy to rent” continues apace in the economy for now. For investors, it has become an alternative asset class with increasing asset values and income yielding well above the current 10-year Treasury rate.

With roughly a quarter of the home buying cohort either unemployed or underemployed and living at home with their parents, the ability to create households has become more problematic. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations. This explains why the 12-month moving average of household formation, used to smooth very volatile data, is near its lowest levels going back to 1955.

The risk to the “renter nation” bubble is a “rush for the exits” by the herd of speculative buyers turning into mass sellers. With a large contingent of homes being held for investment purposes, if there is a reversion in home prices a cycle of liquidation could quickly occur. Combine that with the onset of a recession, and/or a bear market, and the problem could well be magnified. Of course, it isn’t just the liquidation of homes that is an issue but the inability to find a large enough pool of qualified buyers to absorb the inventory.

Just something to think about as you catch up on your weekend reading list.

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Comments

beemasters TeethVillage88s Fri, 07/13/2018 - 21:13 Permalink

"As the 'Buy-to-Rent' game drives prices of homes higher, it reduces inventory and increases rental rates."

In this era of digital apps and social network, I'm surprised no one has yet come up with an "Rent-to-buy" app to enable renters to jointly (in whatever share) become possible co-owners of homes they are/will be renting. It's a simple do-able concept that needs some thoughts of execution to help young, first-time buyers.

In reply to by TeethVillage88s

JRobby helltothenah Fri, 07/13/2018 - 18:29 Permalink

The plan is to convert the USA to the "European Model" :

Socialism / High Tax

Police State

Large % Renting

So the " Everyone Will Own A Home" rhetoric started in the 80's, gaining momentum and of course support from increasing GOVT programs building to crescendo and a planned crash in 2007/2008.

THIS IS ALL BY DESIGN

Globalists in here down voting as always

 

In reply to by helltothenah

TeethVillage88s michigan independant Fri, 07/13/2018 - 16:39 Permalink

Don't he mean Rentier Nation?  $184 Billion in REITs for Residential REITs... but add to that Hotel Reits and Diversified REITS.

- Florida will allow you to buy old beach hotel rooms to live in... just like living in Thai Condo I guess except old and cheap in Florida... Sorry Governor of Florida or the Florida PAC (fucking assholes)

In reply to by michigan independant

hannah michigan independant Fri, 07/13/2018 - 16:59 Permalink

all of these numbers have huge inconsistencies......most bubble housing was never owner occupied (or occupied by anyone) so the numbers are worse than shown. also the 'profit' from renting to sec8 is a joke. i knew a lady that bought an alligator at the height of the housing bubble. 2 story home in a nice neighborhood. rented it to a non us citizen from nigeria. 6 unmarried women moved in with about 16 foster kids and various taxi driver (males). they must have been pulling in $100k plus and NEVER PAID RENT FOR THE YEAR THEY OCCUPIED THE HOME.

 

THEY HAD A GOAT LIVING IN THE HOUSE....the interior had to be stripped...cost a fortune. in 10 years MAYBE 6 tenants paid rent.....

 

the lady landlord bought the house so she would 'have a job' in the eyes of her husband.........

In reply to by michigan independant

TeethVillage88s michigan independant Fri, 07/13/2018 - 17:00 Permalink

Under the English Royal System/Manoral System...

- Wealth Extraction is

- Property Taxes while preventing the idea of Property Ownership

- Utility Payments, Monthly, while preventing the idea of property ownership

- Keep Real Estate Prices high for County Govt, for FIREs industry, for national inflation scheme, for deflation of monetary currency, planned inflation by fiscal policy and monetary policy,... Extract Wealth of Youth/Middle Class/Slubs/Gomers/Geeks/Red Necks... after 1971 expand credit & credit cards as the Breton Woods agreement dissolved and US Currency Collapsed... Expand Trade/Banking... Deregulate Banking & Trade... Reduce Labor Compensation Rate... Target all Govt funds even Social Security, Medicare, Health Care, MICC, Emergency Services Budgets, expand control of the country through nationalism/national funding programs...

In reply to by michigan independant

LawsofPhysics Fri, 07/13/2018 - 16:33 Permalink

Simply put, debt slavery.

thanks to The Federal Reserve Bank, and it's owners the world has been and continues to practice a "let the majority eat cake" monetary experiment. The Fed has access to all the money/credit it wants with no requirement for real work or real risk!

think about that the next time you pay taxes (the fee required to pay the Fed for doing their "job")

we all know how this turns out, eventually...

 

Drater LawsofPhysics Fri, 07/13/2018 - 16:42 Permalink

Sold my house in SoCal a year ago (for a 250K profit) and it's the best thing I've ever done. 

Enjoying the sense of freedom of being able to live anywhere I want and not stressing about major repairs, "to do" lists, upgrades/remodels, natural disasters, neighbors from hell, etc. Will never have to deal with contractors, plumbers, and realtors etc. again either. 

In reply to by LawsofPhysics

Drater shovelhead Fri, 07/13/2018 - 17:10 Permalink

If my rental house collapses in an earthquake/burns down, or neighbors from hell move in next door; I give the keys to the landlord and move on without a care in the world.

Owning a house greatly reduces my options/flexibility which is a huge priority. Setting up my life to have as little responsibility and hassle as possible. Did the "American Dream" thing for 25 years now it's time for the next chapter in my life.

I despise living in CA now anyway and can't picture myself living here when I retire in 2 years when I turn 51. Will set up a mailing address in NV but will be traveling pretty much full-time.

In reply to by shovelhead

1 Alabama LawsofPhysics Fri, 07/13/2018 - 16:48 Permalink

i really dont think we do,(know how it turns out) its like how did we evolve from an ape to a human w/o a thinking companion to raise the foriegn species (child). There is a missing or extincted link back there. This same type of link (a financial one now), is missing to further the human race. Or is some high percentage of extinction still on the plate for humans, just sayin

In reply to by LawsofPhysics

TeethVillage88s LawsofPhysics Fri, 07/13/2018 - 16:49 Permalink

Stratify the Investors in US Real Estate:

- Foreign Investors & Holders of US Debt

- Notice what? BEA IIP International Investment Position as $34 Trillion in 2017

- RIETS are many and varied, $184 Billion in just Residential REITs alone, Health Care REITs should be treated with as much hostility...

- Hedge Funds, University Trust Funds, Pension Funds all may invest in US Housing, US Real Estate,... to extract rents from US Consumers... say you disagree

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease… (Table C is Annual Figures right)  ($34 Trillion US Dollars of Liability to Foreign Nations)(We will sell them Toll Roads, Toll Bridges, National & State Parks, and our Personally Identifiable Identity Data, Background Data, Spy Data, Data on US Citizens... for collateral... for negotiations with foreign investors we give up our citizens that fail background checks)

In reply to by LawsofPhysics

surf@jm Fri, 07/13/2018 - 16:36 Permalink

Well, thats what happens when the government prints its currency into worthlessness to fund a socialist welfare state.......

The fools who go to work everyday thinking that they have a financially secure future earning fiat currency, suddenly realize that actually they are poor, and scratch their heads wondering why the promises of corrupt lying politicians hasnt fattened thier wallets......

Just ask any Venezuelan that isnt part of the ruling class of commies......

2banana Fri, 07/13/2018 - 16:37 Permalink

Ah - the fruits of QE1, QE2, QE3, QE4, Operation Twist, ZIRP, HARP, HAMP, TARP, not banker in jail, bank bailout after bank bailout, adding more to the deficit than ALL other administrations combined and accounting for inflation, etc. etc. etc.

You didn't build that!

Hope and change!

Foward!

Dirtnapper Fri, 07/13/2018 - 16:40 Permalink

Wait a few months as food prices soar to unheard of pricing as the Grand Solar Minimum does it's worst to crop production (ie extremes of weather with droughts, floods, longer wet winters that delay planting and pushes for early harvesting).

Cloud9.5 Fri, 07/13/2018 - 16:54 Permalink

I live in a blue collar neighborhood that went through the boom and bust cycle in 08.  Houses around me went into foreclosure.   We get them for around $50 k.  We gut them and completely remodel them for another $50k.   We rent them for $1000 a month.  People are falling all over themselves to get into them.  We intend to buy one more and then we are done. 

There is no interest to be had on your money.  We do most of the work ourselves.

My Days Are Ge… Cloud9.5 Fri, 07/13/2018 - 18:13 Permalink

I have been a residential landlord for 30 years.  Did the gut equity work in the 1980s and 90s.  Still own the properties.  Are you cut out to deal with people.  I must be.  I rent 10% under the market and keep good tenants for long periods of time - one person going on 10 years.

There is only one question to ask:  After you have done all of the work and rented the property, how much can you quickly sell it for to an investor.  If there is no strong interest in the area or your property, then you are making a bad investment.

If you have $100,000 cash money in the bank; and if you can deal with the tenants; then, this could be a good deal from cash flow standpoint.  30% of your rents go to expenses (on a cash investment and not a mortgaged one).  You net 70% of $12,000 a year or 8.4% of capital which is excellent (assuming the the tenants pay the utilities and snowplowing/shoveling/grass cutting).  And with no vacancies and no commission on rentals.

100% financed - you make no money and take too much risk: Borrow at 5% and bag 8.4% gross, leaves you with a 3.4% net profit margin under perfect circumstances.

Would you live in that neighborhood.  If yes, then buy a 2-family house.  Rent one apartment and live in the other one.  Fix up your side and switch apartments.  You get more rent for a nice apartment.  Then fix up the crummy one.  Once your situation is stable, move to a new duplex and keep the first one.  There are a lot of tax advantages in doing this.

But, the best situation is to have fully paid for buildings, 100% occupied, in good condition and in a desirable neighborhood of a desirable town.

Good luck.

 

 

In reply to by Cloud9.5

tion Cloud9.5 Fri, 07/13/2018 - 18:55 Permalink

A lot of those blue collar neighborhoods didn’t boom quite the way other places did, and the bust ended up putting them underneath the mortgagable threshold for would-be owner occupants. Many years later some of those areas are still having a hell of a time trying to crawl out of that hole. Those areas would remain terribly blighted if investors hadn’t come in.  As bubbly as RE is getting there are still some deals to be had amongst unmortgagables.

In reply to by Cloud9.5

ThankUGartman Fri, 07/13/2018 - 17:18 Permalink

That company Tom Selleck gives his reverse mortgage pitch for is doing about 500/day right now. 5 years ago it was about 100-120. Somebody knows real estate will not be going down soon. Where do they get the financing to continually buy all these houses?  

Eventually all those properties will be bought and paid for with money from thin air I’m guessing.

hongdo AGuy Fri, 07/13/2018 - 18:55 Permalink

Yeah.  It always seems like it will go on forever til it doesn't.  I got out just before the last crash - I had 4 properties. I kept asking myself - how many people can afford a $1M house?  And dealing with tenants in the emerging PC age was becoming a real crap shoot.

In retrospect I was wrong as it recovered (assuming I could have stayed cash-flow positive through the dip)

I may be too conservative but I learned real estate from my first landlord, an out of work physicist who remodeled his own properties in Boston Back Bay.  He told me the objective was to net 20% on up-front cash.  

Now taxes are a major consideration.  Tax law and local rules have changed and you now need to qualify as a real estate professional to succeed.

In reply to by AGuy

PitBullsRule Fri, 07/13/2018 - 17:50 Permalink

I don't understand how you guys still don't get it. Real estate is an asset that everybody wants because they live inside it. The population goes up, and the price of real estate does too. Stocks can be diluted with added shares any time. When you buy a stock its nothing more than an entry on someones record keeping system. When you buy a house you can rent it, it appreciates, and its tax deductible. Thats why everybody wants one, thats why they are expensive. If you don't like houses, live in a hotel, its good for the economy.