With every positive aspect regarding the real estate business, there is a corresponding negative. In the case of rental demand, monthly rental amounts have continued to increase over the past few years. The negative, however, is that with this increase, we may be reaching the point where rents have become too high. Should this trend continue, renters will test out the market to purchase a home. The biggest complaint for most renters is that they view their monthly payment as throwing money away that could be used to pay down a mortgage. If owning becomes a better and more affordable option, that is the way the market will shift.
People rent for a variety of reasons. Affordability, convenience, necessity and location are chief among them. There is still a large segment of people who are renting because their properties were underwater and they fell victim to the mortgage meltdown. These people have waited a few years as renters and are now starting to enter the buying pool. They figure, like many others, that if they are paying $1500 to rent, they can get into a mortgage for $1200. Not only is the payment less, but their money is being used to build equity and retirement savings.
In a perfect world, this would be the ideal situation. The problem is that many buyers are still having trouble getting approved for a mortgage. FHA guidelines have changed, increasing the minimum credit score requirements and PMI amounts . Without the aid of FHA mortgages, the next minimum down payment amount is five percent. Once you tack on the closing costs, property insurance and tax escrows, many would be buyers simply do not have the assets to close. This leads them back to the rental market and at the mercy of current rental prices.
What frustrated renters are now looking at is reducing their expectations for homeownership. We were spoiled last decade when financing was easy to come by and there were numerous properties on the market. Reality has started to set in. If you want to buy a home you can afford, you should lower your purchase price range, thus lowering your down payment amount. This will give new homeowners the lower payment they are looking for with the asset requirements they have. The offset is that the house they will live in won’t be as nice as the one they are currently renting, but at least they will get something for their money every month.
If you can’t capture the rental demand, you should focus on affordability with any properties you are selling or rehabbing. Knowing that approvals and down payments are still an issue in many areas, you can look for lower priced properties that buyers want. There will be a rush on buyers in the very near future, as rental prices will start to become too high for renters’ tastes. It may not happen this year or even next, but if you position yourself now for when the shift happens, you will reap the benefits.