The demand for homeownership has always been a primary indicator of the state of the national economy. Historically, inventory levels fluctuate, leading to a direct change in demand, prices, interest rates and new construction. Today, we see an addendum to this history—an enormous demand for single-family rentals.
With the increase in demand for single-family rentals, we see a significant decline in the demand for homeownership.
At first glance, it appears demand correlates directly with creditworthy buyers. However, a closer look reveals that 30% of previously in-scope buyers have been eliminated from the market, most likely permanently as result of a change in life style not credit score. The new paradigm: “buyers who demand flexibility and mobility over homeownership and equity.”
The market anticipated a decline in qualified buyers due to credit ratings, but instead of renting until the market improves, qualified buyers are accepting single-family residential leases for extended periods of time and staying in the property. The attitude of “I can buy, but I choose to rent” is becoming far more accepted, signifying a cultural shift that supports REO to rental may extend beyond the crisis and recovery.
The crisis, along with the measures in place to help recovery, has created a perfect storm for opportunists. Consumer demand, single-family inventory levels and the low cost of capital have created a new asset class among investors. At the current rate of investment and levels of demand, the program may even create an entirely new asset class for Wall Street.
There are mixed opinions on whether an REO to rental asset class can sustain itself long-term, and whether an increase in single-family rentals will negatively affect overall recovery.
However, the home market hasn’t always been the driving force behind the economy and doesn’t necessarily need to be the main driving force for recovery. In the past, housing was only one of the factors for economic well-being, and the new “mobile” segment of our culture is again looking at other investment vehicles that will contribute to economic growth.
In fact, many even point to an overly robust housing market as one of the primary causes of the financial crash. With such a huge aspect of the economy failing, everything else came down with it. In this way, a healthy market that plays a supportive role rather than an economically dominant one could be beneficial over the long haul.
The housing landscape looks like it will never be the same. So how do we define a healthy market in which housing is not the driving force?
Like homeowners who are deciding to become long-term renters, there must be an overall change that redefines housing strength based on controlled growth. It is time to accept that REO to rental is here to stay and begin the transition into a different kind of recovery.
Earl Cummings is president and CEO for BestAssets, a nationwide REO management company. www.best-assets.com