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A Renter’s Dilemma: The Down Payment

house-jarAt the moment the media is sending out a lot of mixed messages with regards to the health of both the economy and the housing market.  Some reports are adamant that the housing market is on a downward slope, whereas others view the present moment as a time which the economy and the markets are gaining momentum and building strength. At this point, it depends on which factors are being taken into account to arrive to these conclusions in order for them to hold true, but whether the housing market is currently exhibiting a downward or upward trend, there is a specific issue stalling the very factor that is crucial for the health of the housing market, and that is a high concentration of renters unable to save enough for a proper down payment to be used for home ownership when homeownership is “a keystone of success and financial stability in the U.S” (Housing Wire, 2014).  A cycle has been created, and at this point it will take a lot to change the path of this trend.

The economy is performing better than it has since the recession, and so is the housing market.  The U.S. has experienced recovery in job growth, rising home prices, decreases in short sales and foreclosures, construction in multifamily homes, and an uptake in rental properties since the recession.  However, things are still not completely back to normal for the housing market.  Some of this activity can be attributed to households that are already well suited to purchase a home as they have plenty of access to cash for a hefty down payment, and exceptional credit.

The current patterns in the housing market can also be reflective of investor activity.   In a recent blog post entitled “Home Prices in California Continue to Climb.  What Sets it Apart From the Rest of the Country?”, we discussed the increase of investment properties in the U.S. being purchased by Americans and foreigners alike (Broadview Mortgage Orange, 2014).  The article states, “the reason why they have been so prevalent is because they made all-cash offers that are nearly impossible to turn down…Forbes mentions that Zillow, perceived as the Google of the Real Estate market has ‘recently announced that its platform will be available to a select group of brokers working in China, which is ground zero for the foreign buyers that are now penetrating luxury, high-end markets with all cash offers’”.   Housing Wire recently came out with an article detailing that this phenomena may not only be taking place in California, but throughout the country: “Hedge funds bought up most of the affordable distress inventory over the last three years and have turned them into rentals” (2014).   Investors saw an opportunity in the market and acted upon it, but at this point their investments are profiting them at the expense of the housing market, leaving it at an apparent stalemate.  The combination of the wealthy households and investors such as foreigners and hedge funds currently being the more likely buyers left in the market depicts a continuously growing gap between the middle class and the wealthy in America.

Without the housing market performing optimally it will be extremely difficult for the U.S. economy to fully get back on its feet.  The two are certainly not mutually exclusive when it comes to performance as the housing market is analogous to an organ system in the human body – if the organ system isn’t functioning up to par, the body never feels complete homeostasis until the respective organ system has recovered back to full health.  Currently single family new construction is extremely low, alongside depressed formation of homeownership.  Instead, multifamily home sales and rentals are skyrocketing, leaving the housing market waiting to return to homeostasis.

Housing Wire noted, “at the end of the second quarter, the nation had the highest level of renter occupied housing on record.  At the same time, rents are now increasing at a pace higher than home prices, so a higher percentage of income is now being spent on housing in the form of rent.  This is a vicious cycle – burdened households cannot save for the down payments required and are more likely to continue to have less than perfect credit histories” (2014).   In this article, Housing Wire brings up a great point: that the renter’s dilemma is a dangerous one for the likes of the housing market and also for the likes of the U.S. economy.  As more Americans flock to become renters, the more multifamily housing costs because there is a demand for it.  This means less savings for the renters and thus less likelihood that the renters will be able to come up with enough for a down payment on a home if at all.  It also slows down the growth of the housing market, because for those renters that do eventually want to own a home, high rent costs keep them priced out of the ownership market for some time.

The barrier of entry to homeownership (in this case the down payment specifically), is too high of a hurdle for the typical American renter to leap.  This poses a substantial issue to the future of many Americans.  As renters grow old and reach retirement years, substantial rent costs could be a significant burden.  In order to attain the change that is needed, government needs to step on the national, state, and local levels.  At this point the issue has become so prevalent throughout the country that if any progress is going to be made, it needs to be made on a mass scale.  The government has recognized these issues, as recently the Chair of the Board of Governors of the Federal Reserve System, Janet Yellen, brought up that more time, focus, and resources need to be directed towards the job market recovery in a press conference of the Federal Reserve’s latest monetary policy statement.  A stronger labor market could be just the right boost that the United State economy and housing market need to achieve a level of true (not superficial) homeostasis.

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