Slow Housing Sales Tip the Scales Toward Rentals

As the housing market starts to show signs of life, analysts are quick to point out that full recovery is still a long way out. Long-term figures demonstrate that we're only just beginning the long anticipated housing recovery.

Reuters released its monthly analysis of home sales, which reported that home sales rose in November 2011 for the second month in a row. However, the optimism that report sparked soon faded after a review of sales data for the past four years revealed the housing market recession was deeper than previously thought. A miscalculation in the aggregation of local sales data to the national level incorrectly measured the depth of the home-buying drop.

Foreclosures: Adding fuel to the fire

Further hindering near-term recovery is the sudden surge in foreclosures in the third quarter of 2011. In late 2010, many lenders suspended foreclosure proceedings to review how they handle defaulting properties. Now that they've completed that review, lenders are once again moving delinquent mortgages through the system.

The increase in foreclosure rates has a ripple effect in the housing market. When an area experiences a high number of foreclosed properties, the price of non-foreclosed properties drops so that those homes can compete with foreclosed homes. This price-slashing trend leads to

• More underwater mortgages. When homeowners owe more on their mortgage than the property is worth, they can decide to continue to pay the mortgage, hoping the market will improve; sell the property at a bargain price; or let the property go into default, creating more foreclosures, overabundance of available properties — and still lower sale prices.
• Fewer owners, more renters. Under these conditions, many people decide that renting is more economical than purchasing a new home or keeping up payments on their current home.

The tipping point

Typically, as long as housing prices do not drop too low, people remain hopeful and continue to make their monthly payments — especially if they are able to negotiate a modification in their loan terms.

However, as soon as prices drop to a certain level of loss (around one-third of the peak price), many owners decide simultaneously that it's time to surrender their properties, whether through short sales or default. This tipping point creates a surge in foreclosures and bargain-basement prices, which subsequently causes real estate prices to plummet.

What does this mean for real estate professionals?

The slow recovery of the housing sales market creates a huge opportunity for real estate professionals prepared to take advantage of it.

The glut of foreclosed properties, lower real estate prices and reduced mortgage rates make this an optimal time to invest in rental properties. Until home sales rebound, the number of people choosing to rent will continue to grow, and rent rates will increase accordingly.

Today, the greatest opportunity for real estate professionals and investors is in the rental market. It is a growing market that offers a steady, predictable income, which is desirable in this uncertain economic climate.

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