With Rentals Down & Foreclosures Up, Where Are People Living?

It is no secret that foreclosures are at record highs and expected to continue growing for at least another year or two. With this in mind, the one fact that really strikes me is that rental vacancies are growing too!

How can that be?

It seems logical to me that if people have to move out of their homes due to a foreclosure, they still have to live somewhere — and this should be a windfall for the rental properties market. But that hasn’t happened. In fact, rental property vacancies are increasing.

Why?

As my old college professor in marketing research used to say: “Don’t confuse the symptoms with the actual problem.” Relating this to the topic at hand, the problem is not that foreclosures and rental property vacancies are growing simultaneously. This is merely a symptom caused by the real problem: unemployment!

(We could take this a step further and say that unemployment is a symptom of an even larger problem related to the economy, but we won’t tackle that one for the purposes of this article.)

The Problem is Unemployment

The reason that rental occupancies are down at the same time that foreclosures are up is because people are losing their jobs! They are losing their means to pay their mortgages – resulting in foreclosures. With no paycheck coming in, they have no means to pay rent either.

So, my assumption that people would merely transition out of foreclosures directly into rental properties was flawed.

So where are people living?

Sadly, due to unemployment, many people have been forced to move back home with their parents. Others are living with friends. The worse off – in homeless shelters.

Younger adults are delaying their “flights from the nest” and marriage dates until better times prevail. According to the Center for American Progress: “In 2008, for the first time in years, household creation fell – and sharply, too. At the same time, the number of young adults living at home and average marriage ages increased.”

What does the future hold?

With the national unemployment rate currently at 10.3%, most economists see it peaking around 11 percent sometime in early to mid-2010 and then creeping down to around 10 percent by the end of the year.

The bad news: We’re likely in for more of the same or worse conditions in 2010 relative to overall jobless rates – but getting better by the end of next year.

The good news: We should have turned the corner by 2011 with more & more people going back to work.

Who benefits?

• Real estate professionals who either partner with investors or have discretionary capital of their own are perhaps in the best position to prosper from these precarious times due to their resources and proximity to the real estate markets.

• Savvy investors with discretionary capital to invest will also profit greatly from the current residential and commercial real estate markets – assuming history repeats itself. Properties can and will be acquired at bargain basement prices.

• Real estate investment trusts (REITs) specializing in apartment properties should see their stock prices grow in the next several years. As jobless rates decline and people begin to reenter the housing market, many will very likely choose renting over buying — for at least a few years. People will tend to be either “gun shy” or simply not able to qualify for a home loan due to damaged credit (from foreclosure) or tighter lending requirements. Result = higher occupancy and rental rates for apartments.

• Homebuyers with stable jobs will also benefit from great deals on foreclosure properties and record low interest rates.

Conclusion

Well, we solved the puzzle of how apartment vacancies can be up at the same time as foreclosures. In the process of researching this, the situation posed a bit of a moral dilemma for me when considering the human side of things along with the business side. In the end, I have decided, (corny as it sounds) that our present economic and social situations are not unlike the “cycle of life”. Real estate and economies are also cyclical by nature and there will always be casualties and victors. Understanding that I personally am not responsible for the casualties helps me deal with the concept of benefitting from the current state of affairs in the residential and commercial real estate markets. I hope this thought helps you as well.

Author’s Bio

John Hanlin is an Independent Investment Consultant specializing in high yield, low risk investments secured by real estate. He is a seasoned investor of over 25 years and manages the investor’s website: www.JohnHanlin.com. John is also the author of “The LazyMan’s Guide to Understanding Foreclosures & REO Property Investments“.

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