Are Investors Turning Us Into a Nation of Renters?

Fast Fact: Since 2005, the number of renter households has grown 10 times faster than owner households.

WHY IT MATTERS

Big changes are happening in the home rental market that have the potential to affect your own home’s value and your ability to buy a home in the future.

Thanks to a new Wall Street strategy, big investors are buying huge numbers of single family homes and converting them to rentals. In just the last two years, investors have bought more than 200,000 single-family homes mostly through short sales and foreclosures. They purchased more than $250 million worth of foreclosed homes from Fannie Mae alone.

Traditionally, the business of renting single-family homes was a local mom and pop operation. But, as the numbers above illustrate, that landscape is quickly changing as large groups of investors, with no community ties, buy properties in bulk.

Some of these large investors are the very same ones who created and invested in residential mortgage securities, which fueled the real estate bubble a few years ago. Now they’re slicing and dicing debt tied to single-family rental homes and selling those bonds to investors. An estimated $7 billion in these new rental-backed securities is expected to be issued this year, and the market could easily grow to $20 billion.

As a result, lenders are racing to provide financing again — this time to investors instead of homeowners.

In a final twist of irony, many of the tenants in this new breed of rental homes are the very same homeowners who were foreclosed on.

FACT: Since 2005, the number of renter households has grown 10 times faster than owner households.

WHY IS THIS A PROBLEM?

Two reasons:

  1. Becoming a rental nation threatens the ability of many Americans to build wealth. These investors have made big promises about how profitable the securities will be. To fulfill those promises, they’ll charge increasingly higher rent. And while experts say you shouldn’t spend more than a third of your income for housing, many tenants today are paying 40% or more of their income in rent – while median renter income has fallen by 13%. As rents rise, it’s difficult for renters to save enough for a down payment to buy a home, which deprives them of a proven path toward financial security. Home equity has historically been the primary source of wealth for average Americans.
  2. Financial oversight is lacking. If we learned anything from the real estate bubble and bust, it’s that financial oversight of new investments like this is key to ensuring that taxpayers and homeowners don’t foot the bill again if there’s another bust. Think about this: If these investors take on too much debt or don’t get the profit they expect, will they decide to pull out, essentially flooding the home market? Haven’t we learned from our mistakes?

The good news is that some in Congress are taking notice of these new investors. Rep. Mark Takano (D-CA) has asked the House Financial Services Committee to hold hearings on the impact that single family rental bonds could have on America’s homes and homeowners.

Tell us what you think about investors buying up America’s homes, or email your questions to asktheexpert@shariolefson.com

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