Lower Rental Supply, Higher Rental Demand


Two million rental houses and apartments disappeared in this country from 1993 through 2003, reports the Center for Housing Studies at Harvard University. Wow! A lower supply should mean a higher demand. And a higher demand means higher rents.

Put that together with higher interest rates and what should be ever-increasing foreclosures in 2007. According to a recent article in the New York Sun, 62 percent of sub-prime loans made in 2005 were made with little or no income verification. In addition, 52 percent of those loans were interest only or had negative amortization. That means under- and un-qualified buyers will be or already have been in for a shock when their adjustable-rate mort*gages send their payments skyrocketing to the point they can't make them and lose their homes. That will send these ex-homeowners back into the rental market.

Then there are the people who have been using their homes as ATM machines, taking the equity in their homes and spending it on toys and gadgets. Home-equity loans are also usually adjustable, sending payments into the stratosphere. More people who could become ex-homeowners and return to the rental market.

For those of us who own rental property and have been suffering during the last few years of low in-terest rates and fewer renters, that means a glut of prospective tenants in the coming year. That's good news and bad news.

Here's the good news. We will be able to set our standards higher because we will have more applicants to choose from. We will especially have more applicants if we put or keep our properties in tip-top shape so that they attract the best applicants.

Here's the bad news. The credit reports of those people who have been foreclosed on or who have deeded their homes back in lieu of foreclosure will be horrible. The back-end debt of these same people may also be way too high, because they spent lots of money they didn't have for new boats, home theater systems, giant-screen TVs, off-road vehicles, and other toys. Paying for those other things will make their ability to pay the rent questionable.

These bad cre-dit reports and high debt loads will make us want to think twice or three times about accepting such applicants as tenants. That will in effect take many people out of our rental pool.

Here's one more thing to lose sleep over. The new Democratic Congress will undoubtedly try to come to the rescue of those people who were not as careful with their money as they should have been. The first shot across the bow of the rental property industry will not be some new government program, but an attack on the industry itself. I am predicting that the new Congress will at least introduce a bill that would discourage landlords from using a foreclosure as a reason to reject an applicant. Who knows what form it will take, but its presentation will appear as if it is protecting some abused underclass.

The coming year looks like a turnaround for the rental property industry. But no turnaround comes without warning signs and pitfalls. Regardless of the warning signs and pitfalls, though, we need to take this opportunity to raise our rents and rental standards.

By Robert L. Cain, Copyright 2006 Cain Publications, Inc., used by permission. Robert Cain is a nationally-recognized speaker and writer on property management and real estate issues. For a free sample copy of the Rental Property Reporter or Northwest Landlord call 800-654-5456 or visit the web site www.rentalprop.com.

Joe and Colleen Lane are Southeast Washington State Realtors® specializing in Real Estate Tri Cities WA buyer/seller services for Kennewick Real Estate, Richland Real Estate, Pasco Real Estate, West Richland Real Estate, and surrounding areas. Search the MLS for residential houses, multifamily homes, commercial buildings, vacant land, and condos. Professional service providing real estate information for all areas of Benton/Franklin counties. Check out our Free Real Estate Articles. Call Joe or Colleen Lane toll free 1-800-526-3588. Tri Cities Recreation.

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Everyone that gets foreclosed on will be leaving a property behind. That property will sooner or later be either occupied by another homeowner or will be used as a rental. The extra demand appears to be able to be accomodated by the extra supply. How does this help anything?

Spoken Gently

Statistically speaking, when foreclosure rates are up, the demand for rental properties is also up. The reason for this, is that when foreclosures are up interest rates are also up. The increased interest rates, generally the reason for foreclosures, creates a market whereby there are less buyers able to qualify for a loan. Thus, creating a demand for rental properties. Personally speaking, we have 22 rental units and know that when foreclosure rates are up, we have more tenants that want our vacancies.

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