Aug. 19: Rent stats helping lenders & real estate agents – the “freedom tax” for mobility

Let’s move away from politics (for example, someone sent me: “Dear God – If you want us to impeach Trump, show us a sign! Like blot out the sun. Any time in the next week. Thanks – Americans.”) and turn our eyes to…rent! Mr. Thorogood starts us off.

Want to tell you a story

About the house-man blues.

I come home one Friday

Had to tell the landlady I’da lost my job.

She said that don’t confront me

Long as I get my money next Friday.

Now next Friday come I didn’t get the rent.

And out the door I went.

So I goes to the landlady

I said you let me slide?

I’ll have the rent for you in a month

Next I don’t know

So said let me slide it on.

I notice when I come home in the evening

She ain’t got nothing nice to say to me.

But for five year she was so nice.

Loh’ she was lovy-dovy

I come home one particular evening

The landlady said

You got the rent money yet?

I said no, can’t find no job

Therefore I ain’t got no money

To pay the rent.

She said I don’t believe

You’re tryin’ to find no job…

The demographics of renters and rentals are like mother’s milk for real estate agents and loan officers. America’s mismatch between wages and rental prices is worse than ever. Rent is affordable to low-wage workers in only 12 U.S. counties, according to the National Low-Income Housing Coalition’s latest Out of Reach report, which maps the minimum hourly wage required to afford a modest rental based on federal Fair Market Rent (FMR) estimates. Here is a cool map showing the hourly wage that must be earned to afford a rental.

More than 70% of single-family homes in 25 of the 35 biggest U.S. metros can be rented for more than their monthly expenses. Put another way, anyone who believes they have enough money in the stock and bond markets are increasingly turning to buying a rental house, or two. That is another house, or two, that is unavailable for a first-time home buyer.

Certainly, more oldsters, e.g., baby boomers, and single-family renters make moving less likely. One must consider the source, but Apartment List research reveals that 80% of millennials say they would like to buy a home, but 44% have saved nothing so far to do so.

On average home prices around the nation are increasing, as are rents. Scarcity remains the biggest issue driving home price appreciation, as lower mortgage rates have fed a buying frenzy. The West continues to lead the charge.

A new report shows that homeownership doesn’t protect low-income homeowners from the same cost burdens as low-income renters.

As millennials shift from renters to buyers, builders need to scale down the square footage of their homes.

Pew Research finds 36.6% of household heads rented their home as of the end of 2016 – the highest level of renters in 52 years (1965). Reasons cited include higher student loan debt, changing demographics, higher home prices and lingering fears from the credit crisis.

Home Price appreciation continues to accelerate, as the CoreLogic home price index rose 1.2% MOM and is up 6.6% YOY. Rental inflation rose 3.1%, so the increase in home prices is a bit of a double-edged sword. Those who already own homes are getting the benefit of home price appreciation while the first-time homebuyer is squeezed. 

Housing Inventories Drop at Fastest Pace in Four Years.   The housing market, already constrained by low new home inventories, has also seen single-family rentals grab a chunk of sellable inventory, putting additional pressure, said Zillow Inc., Seattle.

Zillow tells us that, per its study, the median rent (half above, half below) in the U.S. is $1,416 per month, which is enough to cover the monthly expenses associated with owning a $289,505 home. But if someone says that the rent is too high, doesn’t that unit go un-rented until the rent comes back down to whatever the market will bear?

Now that the REO-to-rental trade is largely played out, Wall Street is now building houses for rentals. Some are planned communities, where renters get the benefit of living in single family detached homes, plus they get some of the advantages of apartment living, with gyms and common spaces. They also don’t have to deal with maintenance.  Interestingly, many people intend to rent for only a short time period, but end up staying. For one landlord, 1/3 of the tenants have been on month-to-month arrangements for 7 years. The REITs behind this trade also get discounts from builders, lower maintenance costs, and about a 5% – 8% pickup in rental income for a new house. 

These trends aren’t being lost on the rating agencies. Morningstar Credit Ratings published a RMBS (residential mortgage backed security) research report highlighting that with few bulk buying opportunities, block rental home buyers are shifting their focus to the southeast.

The securitization market for single-family rental properties matures, institutional investors have become more selective in their purchases of properties. While Florida remains the industry’s largest market, institutional investors have shifted their buying to states such as Texas, North Carolina, and Indiana. They are finding fewer opportunities in California, Arizona, and Nevada. Morningstar has rated the transactions that have come to market, and found the pace of property purchases has tapered off. The composition of future issuance in single-family rental deals will depend on property acquisition and disposition strategies. For full report, click here.

A while back Jeremy Potter wrote that, “Time and discipline to outline all the complex factors and decision-points involved in home ownership. Ryan Holiday, author of Ego Is the Enemy, published a long, explanatory article about his decision to buy a house. It includes significant insight into how many first-time homebuyers think or should think according to Holiday…it’s the type of article that provides valuable insight for mortgage bankers, entrepreneurs, real estate agents and anyone wondering how the purchase market will fair in the future. The underlying values and desire to own a home is there.

Holiday tells us a lot about how he approached the decision and how many more of his cohort are likely to think about the decision moving forward. His success and income make him somewhat more flexible and privileged than most home buyers. For instance, many homebuyers might not be able to afford staying overnight in Airbnb homes in multiple parts of a new city to determine the best location.  Many more are not able to afford multiple homes in the same area. Nevertheless, Holiday talks about how he approaches the investment, how he thinks about “the commitment” of homeownership and how he deals with real estate agents (spoiler alert – he’s much more favorable of the value of an agent in the transaction but he views agents as a mercenary of sorts which I favor. And apparently other millennials feel like Holiday…until they realize a standard commission, that is).

“Perhaps Holiday’s most articulate point is his description of rent as freedom tax. An investment in mobility rather than community.” Thanks Jeremy!


On the underwriting side, Freddie has the industry’s tongues wagging. Seems like 2 years of Airbnb income qualifies for rental income, like other 1099 economy income sources. But wait: don’t forget that lenders are seeing fraud in the “Reverse Occupancy” scheme. Fannie Mae’s Mortgage Fraud Program (MFP) alerts the industry to potential and active mortgage fraud scenarios.

Reverse Occupancy is not an owner with a reverse mortgage. It’s a borrower who buys a home as an investment property and lists rent proceeds as income to qualify for the mortgage, but instead of renting the home the borrower occupies the home as a primary residence.

Fannie’s memo points out common characteristics of the scheme, which, when combined, point to suspicion. The subject properties are sold as investment properties. Purchasers are first time home buyers with minimal or no established credit. Purchasers have low income but significant liquid assets that are authenticated by bank statements. Purchasers make large down payments. The appraisal has a comparable rent schedule (to show expected rental income from the subject property). Purchasers present “rent free” letters stating they are not paying rent to live in their primary residence.

What can lenders do? Prudent origination, processing, and underwriting practices should include looking for “red flags” in the loan documents that raise questions about the transaction. Closely reviewing liquid assets as compared to income and the source of qualifying income can identify a potential reverse-occupancy scheme.

Not surprisingly, down payments are at the lowest levels in 7 years, with the growth mainly occurring in the high single digits are, not at the 3.5% area. It looks like the growth is coming from Fannie and Fred’s low-down payment programs, which are wresting share from FHA. Performance on these loans will probably be determined by the continued price appreciation in the US housing markets. While general riskiness is higher than it was 5 years ago, it is nowhere near the risk we had during the go-go years.

Gen X

So, it seems that either the baby boomers or the millennials are garnering all the press. What about Generation X – those born between 1965 and 1976? They are certainly help shift ways of living and doing business. Pew Research finds 85% of people now get their news on a mobile device vs. 72% 1Y ago. Further, a whopping 67% of people age 65 and older get their news on a mobile device vs. only 43% over the same period. Clearly things have shifted quickly across all demographic cohorts so bankers too will have to adapt their marketing approach in turn.

Gen X was the first of the alphabet tail end generations that became so fascinating to marketers and advertisers. Lately, however, it seems this generation has been losing some of its appeal to lenders and bankers. The reason is a perceived shortage of capital in Gen X. That makes sense when you consider Gen Xers took some of the biggest hits to net worth from the series of setbacks that included the dotcom crash, the housing crash and the recession. By some estimates, Gen Xers lost 45% of their net worth just in the dotcom crash.

Steve Brown with PCBB observes that, “Yet, after taking it on the chin for years, Gen X has come roaring back. They have moved up the personal finance food chain, with improving incomes and spending patterns that turn retailers’ heads. According to Capital Performance Group, Gen X now accounts for 37% of all mass affluent households (those with more than $100,000 in annual incomes). That is interesting indeed when you find out that this group only makes up 20% of the population, but represents about 25% to 31% of current consumption in the US. Certainly, Gen X appears to have recovered nicely from its previous financial set-backs.

Mass affluent households are some of the best prospects for lenders and community banks, so maybe it is time to re-engage with this demographic group. Given that Gen Xers account for about 40% of mass affluent households, a community bank that fails to recognize this potential may be missing an opportunity for growth that is rare to find in the competitive banking landscape today.

So how should a community bank (or lender) approach this generation? The first step is recognizing one of the unique characteristics of Gen X. It is the first generation to live as adults in the digital age, so it is the first generation to live in a world with constantly changing digital products and solutions. However, Gen Xers are not that far removed from the Boomers, so they still have a connection and want an experience with more traditional businesses like bookstores and bank branches. Marketing experts will tell you that Gen X also has a somewhat split personality favoring a blended approach that combines digital and direct contact. This is where community banks can shine – providing robust walk-in and digital banking strategies that appeal to this generation. Also, since Gen Xers are being approached as mass affluent households, remember to incorporate the same efforts that apply to any mass affluent household when you do so.”

When I was a kid, we’d occasionally go through a yoyo phase. Most of the kids on my block were happy we could “walk the dog” or do an “around the world.” Things have changed, of course, and here is a 3 minute video of this year’s yoyo champion – no need to watch the whole thing, as you’ll get the idea within 30 seconds that you’ll never be able to do any of this. (Page down once or twice.)

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Rob Chrisman