Let’s Talk Real Estate – by Graham Farran, Expert Properties
Rental Market—There are two inter-related trends that have impacted the rental market. The first is the rapidly growing number of Americans who cannot afford to buy a home. These are the millions of “Generation X and Y” young adults who do not have the money, credit scores or income to qualify for a home mortgage. Their only options are to rent or live with their parents.
Second, we have an increasing number of renters who’ve lost their homes in the “Great Mortgage Fiasco.” Hundreds of thousands of families across the nation have been faced with the unseemly choice of giving their house back to the lender or experiencing the dread of foreclosure. Those families who have lost their homes make up a new breed of residential renters. We see them renting the nicer homes; they are people who think like owners, not renters. Property managers like us have to make allowances for credit scores when screening potential residents. Many of these people who have lost their homes may have low credit scores but make great, responsible renters. Some are couples where one of the wage-earners lost their job and their income was reduced so drastically they could no longer afford the mortgage. They are not a bad credit risk, just people who suffered a string of bad luck. They have a “pride-of-ownership” mentality and want to live in a nice home. They actually want to take care of the rental as if it were their own home. These are great renters.
More evidence is mounting that only about half of the foreclosures and REO houses have hit the market yet. That’s correct: as many as 50% of the mortgages that have gone into default have not been foreclosed-on and put up for sale. With both home sales and home prices going up, most banks are in no hurry to foreclose; time is on their side. The demand for rental housing has been increasing and will continue to increase in the months (maybe years) ahead. We will continue to see a shortage of rental housing, which means rental prices will continue to increase.
Because of the increasing demand on the rental market, the last few years has seen rents climbing and occupancy rates remaining high. Nationwide rental statistics recently released by Axiometrics Inc. revealed that rental prices rose 5.16% in 2011 and 5.17% in 2012. The single family rental market demand has expanded by 16% since 2007. Axiometrics predicts an additional 1.7 million new renter households between now and 2015. We are seeing these trends play-out in our local business. As an aggressive property management company, we are seeing average length of vacancy of only 3 to 5 days. We also work with seemingly desperate relocation tenants that need to move and are renting homes sight unseen over the phone. These are professionals who are relocating to take employment in our slowly improving local economy. They often transition into buyers that purchase a home.
Rent or Buy?—Because of all-time low interest rates and home prices that have risen more slowly than rents, buying is now cheaper than renting in many markets. A survey by Trulia.com states that, on average, owning a home is as much as 45% cheaper in the 100 largest U.S. metro areas than renting. We see this every day in the rental homes we manage that are priced under $350,000. At current mortgage rates, the mortgage payment would be less than the monthly rent payment. On homes priced above $350,000, this is not necessarily true: the rental price of the home is less than the mortgage. In Jacksonville, a nice $300,000 home would rent for around $1500 a month and if you had 100% financing, one would pay around $1,480 month in mortgage payments. In West Medford, a little 3 bedroom/1 bath cottage would rent for $1,000 a month. It would sell for $100,000, but the mortgage payment would be about $500 a month. So owning can cost far less than renting, while also providing tax breaks and possible appreciation benefits.
Lending—Many are surprised to learn that even after the mortgage meltdown, there is still a huge range of loan products available, including low, to no-down payment options. There is a USDA rural loan that can be used in most areas of Jackson County, except the cities of Medford and some areas of Central Point. This loan requires very little to no down payment, and can be used to purchase a home. Another loan from FHA requires less that 4% down. If you are a veteran, there is a great VA loan requiring nothing down. In conjunction with using these low down payment loans, one can also ask for seller credit for most, if not all, of the closing costs.
So, from a purely numbers standpoint, right now it makes more sense to buy rather than rent, except in high-end homes. There are two catches. First, you have to qualify for a mortgage, which may not be easy for those drowning in credit card debt, student loans or those with credit score below the mid 600’s. Second, you need money for a down payment and closing costs, which, for most, is the difficult part. If you can come up with the down payment, have a credit score of mid-600’s or higher, and are currently renting a home valued at less than $350,000, you could probably own the home for less!
Graham Farran of Expert Properties in Jacksonville, Oregon
Graham Farran is a broker with Expert Properties, located at 620 N. 5th Street in Jacksonville. Please contact them at 541-899-2030 or online at www.expertprops.com.
Posted September 8, 2013