Rentals are amplifying the housing collapse

From Wall Street 24/7

CNBC ran a brief segment on the number of people who have decided to rent homes and apartments rather than buy them. The point of the reporting was simple. People who need to move out of their houses sometimes cannot sell them. Instead, they rent wherever they have moved and hope to sell their homes later when the market improves.

In addition, people who cannot sell their homes often rent them out to others to help cover mortgage and maintenance costs.

What has been lost in the review of home buying and renting habits is that some people who own a home will decide never to buy one again. The reaction to losing so much money on what is the largest investment many people will ever have will be, in many cases that they will not come back to the real estate market again. People who have suffered through anxious months not knowing if they will be able to pay their mortgages may decide that it is not an experience they want to repeat.

There are currently 3.4 million homes for sale in America. The average prices of these homes drops each month. Neither lower interest rates nor better prices are bringing buyers back into the market. Too many people believe that the market has not made a bottom. No one wants to own real estate that could lose another 15% of its value.

The renter does not have to lose sleep over the issue of whether his home will fall further in value. He does not have to worry about an ARM with an interest rate that might be set higher. Renters do not even have to worry about major repairs, the great enemy of the homeowner.

Renting was considered a fool’s way of living just a decade ago. A renter could not get equity in a property like the one that his homeowner friends had. A new house could double in value in ten years, offering the owner ready access to capital, a way to educate children and pay for vacations. With very few people willing to believe that those benefits are still a part of owning a home, the incentives to buy one have dwindled.

Realtors believe that the economy is at the root of the reason that people will not buy homes. That is true to some extent. People who are worried about their jobs or have seen their stock market holdings lose half of their values are not likely to be in the market. But, the shift may be more profound than that. Renting could become the norm for many people, especially those who cannot foresee a future when real estate is an asset which can rapidly increase in value again.

Douglas A. McIntyre

The only disagreement I have with Mr McIntyre is the yet decline. He says 15%. It's more like 30%.

Things are going to be long, deep and difficult.