Rent and Lease Housing’s Blog

Introduction - Economic Overview

This article is aimed at anyone who has bought a house in the past few years.

If you thought the 2007 real estate market was bad, what do you think of 2008?  Forget about just the real estate market, what about the whole 2008 economy!  Even Alan Greenspan admits that there were errors1 on the Fed’s part in regards to the current housing downturn and credit crisis.  If we had just paid a little bit more attention to what Warren Buffet and Charlie Munger2 said in 2005, “he and Munger issued stern new warnings about the residential real estate ‘bubble’” and “the destabilizing effect of hedge funds on the financial markets.”

But as the old saying goes “Hindsight is 20-20.” NOW, we are acutely aware of the blunders that have been made.  And yes, we can play the blame game and point the finger at the Wall Street Bankers, the banks, the mortgage brokers, and even the people who bought houses in the last couple years (I know that last one is not the going to win me a popularity contest), but let’s just agree that it is impossible to predict the future, and if you can, what are you doing reading this article? Shouldn’t you be lounging at the beach?  Anyhow, currently the stock market is in an emotional manic state, unemployment is on the rise, housing prices continue to fall, credit is tough to get, large banks are failing and inflation has been rising.  It is hard to find something positive about the current US economy.

But back to the real estate market, let’s examine a general outline of what was the root of the real estate bubble and credit crisis.  First, we went through a time, specifically 2003-2006, where credit was extremely easy to get.  Lax and creative mortgage guidelines produced an increase of demand for home ownership.  Since the demand for home ownership increased, home buyers created a sharp rise in home prices.  For example, the S&P Case-Shiller U.S. National Home Price Index3 reported double digit appreciation from 2002 to 2005.  Housing prices were far outpacing the increase in wages.

Nevertheless, in 2006 the “creative financing” of the large investment banks, who expanded the subprime and Alt A mortgage markets, produced a larger than ever expected problem (or a better yet, a catastrophe).  These subprime and Alt A mortgages were packaged into “Collateralized Debt Obligations” and “Structured Investment Vehicles,” and sold to investors world wide; however, these investments were not as safe as bond rating agencies claimed or worth as much as what they were sold for.  The CDOs and SIVs began racking up huge losses because a greater than anticipated amount of mortgage loans backing the CDOs and SIVs were defaulting.  This meltdown created a trickling down effect which has been a large contributor to the 2008 economic downturn.  The end result has produced declining housing prices, tighter credit markets, huge losses for banks, increased mortgage costs, and government intervention in the free markets.

So to get to the point I am trying to make, what do people do who have bought houses in the last 4 years? What if they are struggling to make their mortgage payment or cannot refinance out of their current mortgage due to the decline of their property’s value?  It is extremely difficult to sell a house in this real estate downturn.  Also, it does not help that the costs to obtain mortgage financing have increased.  For example, at the beginning of 2008, the up front mortgage insurance on a FHA insured mortgage was 1.5%; however, currently the up front mortgage insurance has now increased to 3%.  To quantify that amount:

Beginning 2008:

$300,000 mortgage x 1.5% = $4,500

Now, October 2008:

$300,000 mortgage x 3.0% = $9,000

Furthermore, the increasing amount of homeowners facing foreclosure has jumped because of 2/28* and 3/27* adjustable rate subprime mortgages.  The rate sometimes doubles after adjusting which leaves those homeowner’s cash strapped with nothing else to do but face a short sale or foreclosure.

So let me pose this question to you: if the demand to be a homeowner is very low and the cost of buying a house has increased, what are the people doing who want to buy a house but cannot obtain mortgage financing?  Or the people who are not interested in buying a house in this current market?

I will tell you what they are doing: they are RENTING!

If people cannot buy a home, they still need a place to live.  So if there is a market generated increase in the demand to rent a house, and you are one of those homeowners contemplating what to do with their home, wouldn’t renting your property be a rational and intelligent option? For example, renting out a property can provide a great tax advantage and provide income to offset your current mortgage payment.  Moreover, renting your property could prevent a possible foreclosure, a large capital loss, and save your credit.

So please stay tuned and read through the following articles to help educate yourself on how renting your property in this volatile real estate market might be rational move and a safe bet.

Introduction: Do Not Sell Your House, Rent It

Step 1: Renting vs Selling - Analyze Your Situation

Step 2: Renting Your House - Create a Plan

Step 3: Signing a Lease - coming soon!

Overview of Process - coming soon!

* A 2/28 or 3/27 subprime mortgage was a mortgage loan fixed for 2 or 3 years and adjusted after the fixed period expires.  Many of these types of mortgages had prepayment penalties on them, so homeowners would have to pay a prepayment penalty if they would refinance before the prepayment penalty expired.

Sources

1Greenspan Has No Free Market Philosophy, Claims Ayn Rand Center’s Yaron Brook
2Warren Buffett and Charles Munger warn of real estate ‘bubble,’ the risk of terrorist nukes
3Case-Shiller index