The Return of the Renter
We can trace the origin of the return of the renter to 1977 with the passage of the Community Reinvestment Act. But the act’s passage and initial enforcement didn’t have any particular effect on home ownership. That had to wait 28 years.
There were fewer and fewer renters for about 30 years as the homeownership rate climbed from 62.1 percent in 1970 to 69 percent in 2004. Now, with the housing market crash, the millions of underwater homeowners, and the millions of foreclosures, the tide is turning. Renters are coming back.
We are poised this year to drop past the year 2000 when 66.2 percent of the population were homeowners. At the end of the third quarter of 2011, it was 66.3 per- cent. There are 110 million households in the United States, reports the Census Bureau. With that drop in homeownership, it means another 308,000 households must find a place to live. (At 2.58 people per household, according to the Census Bureau, it is almost 800,000 people, or about the population of Austin, Texas.) That is enough to fill 308 100- unit apartment complexes, 77,000 fourplexes, or 154,000 duplexes.
But this is not all good news for rental owners and investors. We have seen the fallout affecting the entire housing market, not just the owner-occupied part of it. We have seen investors overextended, with a lack of qualified renters, forcing them into bankruptcy and foreclosure. We have seen a decline in the number of available rental units as a result.
But wait. That’s a good thing, isn’t it? Fewer rental properties mean higher demand for those rental properties, which means, in this case anyway, 308,000 more prospective tenants chasing the same vacant units, which means landlords can charge higher rents, which means landlords can raise the rental standards to eliminate the marginal tenants they had to accept just a few years ago. It is a good thing for those who have survived the downturn and for those looking to invest. However, the housing crisis has spilled its goo over the entire economy, not just homeowners.
It is interesting to go back to the beginning. Nothing much happened with the Community Reinvestment Act (CRA) until 1993, the first year of the Clinton Administration. CRA was passed to watch out for discrimination in real estate loans, both residential and business, in low- and moderate-income areas. The FDIC watched and evaluated how banks were doing as per Sections 802(b) and 804(1) of the act.
Section 802(b) reads, “It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.”
Section 804(1) follows with, “…in connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall—
(1) assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution; and if the FDIC were to find a lender had done something “bad,”
(2) take such record into account in its evaluation of an application for a deposit facility by such institution.
USC Title 12 •Chapter 30
Everything went on relatively innocuously until Roberta Achtenberg became Assistant Secretary for Fair Housing and Equal Opportunity in the Department of Housing and Urban Development (HUD). The Clinton administration’s agenda was to “increase home ownership among the poor, and particularly among blacks and Hispanics.” Messing up that agenda were the conservative lending policies of banks. Blacks and Hispanics often could not come up with the cash deposits and regular payments banks required. Clinton wanted banks to be more creative.
In order to accomplish that goal, Achtenberg set up regional offices, each with investigators and attorneys, to be on the lookout for discriminatory lending practices. Any intimation of “bad behavior” could result in the banks being
That worked. Banks began to quit all that rigorousness in their lending criteria. Mortgages went to 3 percent deposit requirements and then to no deposit requirements. Banks couldn’t wait to get into the game of handing out loans to people who could meet the requirement of breathing and being able to sign their names.
Banks began to be rated on how much lending they did in low-income neighborhoods. A good Community Reinvestment Act rating meant that banks got on the good side of regulators when the banks wanted to expand, merge and open new branches.
It got even more interesting in 1995 when the Clinton administration suggested to Fannie Mae and Freddie Mac that they even make loans to people who might not even have qualified with the “breathe and sign your name” criteria. To protect Fannie and Freddie, banks were allowed to securitize the loans, slicing them up and marketing them to investors around the world. All that creativity caused an 80 percent increase in the number of bank loans going to low- and moderate-income families.
Russell Roberts, an economics professor at George Mason University, added even more. He wrote in the Wall Street Journal that in 1996 HUD gave Fannie and Freddie “an explicit target” that 42 percent of their mortgages had to be to borrowers “with income below the median in their area.” Russell reported that the target was increased to 50 percent in 2000 and 52 percent in 2005.
The National Housing Institute at Harvard University adds even more interesting information. In a 2003 article “Has Homeownership Been Oversold” by Winton Pitcoff in Shelterforce Online, Pitcoff pointed out that “Some HUD pro- grams originally designated for rental subsidies have been adapted for homeownership.” Section 8 allowed people to use funds that would have gone to renting to be used for mortgage payments.
Pitcoff reported, “Forty-nine percent of HUD’s HOME program funds were used for rental housing in 1995; that number declined to 36 percent by 1997.” Two-thirds of the HOME program money was going to homeownership as opposed to only about half two years earlier.
The creativity continued when George W. Bush in 2003 pushed the “American Dream Downpayment Initiative” providing up to $200 million to encourage homeownership among low-income, first-time buyers to help pay closing costs and down payments.
Many, if not most, people believed it could go on forever. That housing prices would continue to skyrocket and that real estate was an investment that would never decline—all be- cause of a real estate market artificially inflated by loans to people who either had no business borrowing money or people who gambled on an eternally rising real estate market.
Then it all came apart. The housing bubble popped, leaving slippery goo all over the economy and vacant, foreclosed properties lining some cities’ neighbor- hood streets.
People have to have some place to live. If they are closed out of being home owners, or simply out of the notion of homeownership because of the experience they have had, they must either live with someone else or rent. The point is, they are coming back to us and making being a real estate investment property owner look like a much better idea.
As another article in this issue points out, apartment complexes are raising standards and getting a higher quality of ten- ant. As prices decrease and rents in- crease, it is a good time to get into the rental business. The renters are returning in the hundreds of thousands and chances are many of them are flat out of the business of homeownership forever..
For more information on the origins of the housing crisis and its aftermath, see the book House of Cards by William D. Cohan. 2009, Anchor Books, 468 pages.