Renting From an Involuntary Landlord?

Resale prices in the housing market have declined since 2006 by 28.7% and rent prices have grown by just 2% in the last year.   Since 2006, homeowners who want or need to move elsewhere face the painful dilemma of selling at reduced price or renting the house while they await its price recovery.  Most are not professional real estate investors so they’d prefer to behave as consumers; harvest their home’s equity and move on.  For them, being a novice landlord is involuntary and accidental.  In parallel and despite mortgage rates below 4%, the number of renters has grown as many family units cannot finance home ownership due to low credit scores or hyper-selective lenders who require a FICO of 760-800 and 30% equity.  Vicious underwriting standards have blocked about 1/3rd of those wanting to refinance.

Those renting from novice landlords will probably notice differences compared with renting from professional real estate investors.  Novice landlords are unlikely to be savvy on renters’ rights and the law, but they will quickly learn how to evict if the tenant is destructive. Novices are likely to be conscientious on home maintenance, as they’ll have in mind selling as soon as possible.  Consequently, renters can expect an ownership change when the resale housing market improves.  The novice landlords bring to the rental market a selection of more attractive properties (acreage, beautiful vistas, pricey neighborhood or architecture) since they didn’t buy their home targeting the size-cost sweet spot for average rentals.  Novice landlords who move to another city are likely to bring in professional managers because remote property management works poorly.

So, how long do we expect novice landlords to stay in the market and how long will renting be the compelling option for many families?  Our earlier blog suggests it will take another 5 years: “the trough will be in the first quarter of 2013 at two-thirds of the housing bubble’s peak (first quarter of 2006), and getting back to normal will take until 2016, a decade since decline began.”

So there’s time for novice landlords to learn to collaborate with tenants, and for tenants to work out ways to make the experience better for both.

Alan Daley is a retired businessman living in Florida.  He follows public policy from the consumer’s perspective.

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