Monday, October 20, 2014

Rental fury: The trend for renting continues to grow stronger. Housing starts jump largely on the back of multi-family housing starts.

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By: Dr Housing Bubble

There was an odd sort of rejoicing last week in the midst of market volatility.  Housing starts jumped but the people pointing at this failed to grasp that a large reason for this was because of multi-family housing starts.  In other words, the demand is reflecting a nation that is becoming a renter class.  This trend reflects a new workforce that has more part-time employment and less job security than the previous generation.  Why would you buy a home if your employment is more volatile?  The numbers are clear and we have added over 7 million renter households in the last 10 years.  Right now we are at the peak of renting households.  However, we peaked for homeownership back in 2006.  Since 2006, we’ve actually lost about 2 million net homeowner households.  No need to worry since Wall Street has taken up the slack to purchase those single family homes and convert them back into rentals for the new modern day serfs.  The renting trend continues and the jump in housing starts reflects a change in home buying perception.

Deconstructing housing starts
It probably is worth digging into the housing starts data since some people were going hog-wild on data that reflects a trend towards renting.  Once broken down the solid rise in housing starts was brought on by multi-family units.  In other words, high density lower cost housing options.  You would like to see a higher demand for single family homes if the case were to be made that households were gearing up to purchase homes.  Yet this isn’t something builders are betting on.
First take a look at single family housing starts:
single family housing starts
Can you spot the so-called surge?  Probably not.  Since 2008 home builders have been holding steady when it comes to single family homes.  After all, investors were out in the market looking for lower priced properties to churn out healthier rental yields.  In places like California, many investors have already pulled back and we are seeing the vacuum that is being left.  Many sellers are pulling their properties off the market thinking next spring and summer they’ll be able to lure in some new lemming.

If we look into multi-family housing starts, we find an unmistakable trend:
multifamily starts
That is what a surge looks like.  This is a fury of activity to meet the demand of a renter nation.  No need to spin the above chart since it speaks loudly as to what builders are viewing as the next big thing.  Rents are holding steady and younger Americans are carrying large amounts of student debt and their salaries are unfortunately not all that great.  That is why you have 2.3 million adults living at home with their parents in California alone.
We have added a whopping 7 million renter households in the last decade:
renter and homeowner households
The number of households that rent has increased by 20 percent over the last decade.  This is a strong trend.  This of course is coming at the expense of creating less homeowners.  This isn’t necessarily a good or bad thing.  In fact, I think the crap shack addicted zip code chasers would in many cases be better off renting in the long-term.  Many use the logic of “well over 30 years if you stay…” but rarely do they stay put for that long.  Will you live in a 700 square foot shack for 10 years just to build some equity so you can then move into a 900 square foot shack in the endless property ladder game?  This of course assumes your timing is on given real estate is now a boom and bust business.  This is why in places like San Francisco, you have many high tech workers opting to rent and foregoing the chase to buy ridiculously priced properties.
It should be extremely clear that we are in a solid rental trend.  You can look at the housing start data above and arrive at your own conclusion as to where this “surge” is coming from.

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Fed: Banks easing lending standards

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 Paul Davidson, USA TODAY

The home mortgage market improved last quarter as demand increased and many banks eased their lending standards for the most creditworthy borrowers, the Federal Reserve said Monday.

Banks also loosened lending criteria for a variety of other consumer and business loans as the economy improved and demand picked up.

"The July survey results showed a continued easing of lending standards and terms for many types of loan categories, and a broad-based pickup in loan demand," the Fed said in its senior loan officer survey.

The developments could foreshadow a turnaround in the housing market, which has slowed this year amid last year's increases in mortgage rates and higher home prices.

More favorable credit conditions have been cited as a key driver of stronger economic growth recently. Last week, the government said the economy grew at a better-than-expected annual rate of 4% in the second quarter.

Credit standards for many types of loans, including mortgages, are still more stringent than they were before the 2008 financial crisis, but they've eased in recent months, the survey shows.

Mortgage demand started to flag as borrowing costs edged up after Federal Reserve officials signaled in May 2013 that the central bank would soon wind down bond purchases holding down long-term interest rates.

Rates for 30-year fixed mortgages jumped nearly a percentage point to 4.46% by the end of last year. But rates have drifted down this year — and were 4.12% last week — in part because the Fed has indicated it's in no rush to raise short-term interest rates.

Half the banks surveyed by the Fed in July said demand for prime mortgages was stronger the past three months. Lenders had reported weakening demand the previous three quarters.

Even more encouraging, nearly a quarter of the banks said they eased credit standards for prime mortgages, the most since the 2007 housing crash. Only about 6% toughened their criteria.

Several large banks also loosened standards, boosted credit limits and reduced the minimum credit score required for credit card loans.

A surge in borrowing similarly boosted business loans, with more than 30% of banks citing stronger demand from small, midsize and large businesses and only about 5% reporting weaker demand.

About 11% of banks surveyed eased their standards for loans to midsize and large companies, and 8% did so for small businesses, while none tightened.

Banks cited more aggressive competition from other banks or lenders as the main reason for loosening their standards, along with a more favorable economic outlook.

"The report points to continued gradual healing in the banking, corporate and household sectors," Barclays Capital said in a note to clients.
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Here's why renters in America feel trapped

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Here's why renters in America feel trapped

Yahoo Finance
 In a recent report by the FINRA Investor Education Foundation, researchers offer a sobering peek into the homes of renters. Nearly one-quarter of renters  in a survey of 25,509 renters and homeowners combined say meeting their monthly financial commitments is “very difficult,” and more than half say they wouldn’t be able to come up with $2,000 to cover an emergency expense.

Homeowners, by comparison, feel much more stable. Half as many homeowners as renters say they find meeting their monthly bills “very difficult” and nearly half say they have no trouble meeting their monthly expenses, according to the report.

View gallery
Source: FINRA

Source: FINRA
Because the cost of renting and buying varies so widely across the U.S., you have to take reports like these with a healthy dose of salt. In some metro areas, like San Antonio and Phoenix, it’s actually much cheaper to buy a home than rent.  

But the reality is that the cost of renting across the country is on the rise, straining the budgets of many renters. In the largest 25 metro areas in the U.S., rents increased by 5.5% in 2013, eating up more than 40% of the average renter’s household income, according to Trulia. Most financial experts recommend spending less than one-third of income on housing. 

“Once [rent] is over 30%, that’s when you start getting into the danger zone financially,” says Helen Stephens, a certified financial planner in Dallas. “And the problem when you’re renting is that you may be in a lease for a year, and at the end of that year your landlord has the right to raise the rent on you.”

View gallery
Source: Finra

Source: Finra
In addition to rising rents, coming up with the cash for day-to-day expenses, let alone a down payment, can be tough for renters. Renters are more likely to be saddled with debt of all kinds than homeowners, according to FINRA. More the half of renters carry credit card debt vs. 47% of homeowners. And renters are nearly twice as likely to have medical debt than homeowners, owing to the fact that fewer renters have health insurance. 
Not all renters are 20-somethings eating Cup Noodles and struggling to pay off student debt, either. The average age of renters today is 41, per FINRA, and nearly half of renters say they have dependents at home. 

The road from rent to mortgage

For renters who aspire to own a home one day, the biggest hurdle they’ll face is mastering cash flow — ensuring that the money coming in can not only cover their bills, but also leave them with wiggle room to save. Unfortunately, today’s renters have a lot less capital to work with than existing homeowners. According to FINRA, 74% of renters earn less than $50,000 a year, vs. 60% of homeowners who earn more than $50,000. 

Another challenge facing prospective home buyers: the daunting down payment -- typically 20% of the home’s purchase price. And Stephens advises her clients to build up an emergency maintenance fund of at least a few thousand dollars in case any unexpected repairs are needed once they’ve moved in. 

As for the best place to save for a down payment, Stephens recommends a regular bank account. Banks are offering paltry interest rates on savings now, but it’s a wiser option than investing it in the stock market, she says.
“I don’t believe in investing money in the market that you’re going to need for the short term,” she says. “I know it may not earn much [interest] in a bank but it is secure and it’s for a very targeted expense.” 

Preparing financially isn’t the only step to home ownership . Buying a house is a complex, long-term endeavor that requires a lot of mental prep work. In a FINRA survey of more than 25,000 homeowners and renters, 40% of renters answered a basic question about 15-year and 30-year mortgages incorrectly, compared to just 19% of homeowners.
“No one should buy a home if they can't understand basic finance,” says Ilyce Glink, author of “100 Questions Every First-time Home Buyer Should Ask”. “The quick way to bankruptcy is to buy a house you can't afford, get locked into mortgage payments, real estate tax bills, and maintenance and upkeep expenses.” 

Glink has written dozens of articles available for free with tips for first-time home buyers. But even she recognizes that home ownership isn’t for everyone. Sometimes, renting just makes more sense.

“Choose renting if you don't know where you're going to want to live in five years, if your employment situation isn't stable, and if you can't currently set aside 20% of your after-tax income into a savings account,” she says. “You might also choose renting if you're currently dating someone and hope to be in a long-term stable relationship that involves living together because otherwise you might buy a condo that's too small for your expanding family.”


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