Tag Archives: rent

Caveat Rent-to-Own

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keys-1317391_1920WiseBread quoted me in 5 Things You Need to Know When Renting-to-Own a Home. It opens,

Your credit scores are too low. Or maybe you’ve run up too much credit card debt. Whatever the reason, you can’t qualify for the mortgage loan you need to buy a home. But there is hope: You can enter into a rent-to-own agreement and begin living in a home today — one that you might eventually be able to buy.

Just be careful: David Reiss, professor of law and research director for the Center for Urban Business at Brooklyn Law School, said that consumers need to be careful when entering rent-to-own arrangements. Often, these agreements end up with tenants losing money that they didn’t need to spend.

“Potential homebuyers should be very careful with rent-to-own opportunities,” Reiss said. “They have a long history of burning buyers. Does the law in your state provide any protection to a rent-to-own buyer who falls behind on payments? Could you end up losing everything that you had paid toward the purchase if you lose your job?”

These worries, and others, are why you need to do your research before signing a rent-to-own agreement. And it’s why you need to know these five key facts before agreeing to any rent-to-own contract.

1. How Do Monthly Rent and Final Selling Price Relate?

In a rent-to-own arrangement, you might pay a bit more in rent each month to the owner of a home. These extra dollars go toward reducing a final sales price for the home that you and the owner agree upon before you start renting.

Then, after a set number of years pass — usually anywhere from one to five — you’ll have the option to purchase the home, with the sales price lowered by however much extra money you paid along with your monthly rent checks. Not all companies that offer rent-to-own homes work this way. Some don’t ask for more money from tenants each month, and don’t apply any rental money toward lowering the eventual sales price of the home.

This latter option might be the better choice for you if you’re not certain that you’ll be able to qualify for a mortgage even after the rental period ends.

“A pitfall is if the tenant buyer signs into the program but will never be approved for financing, thus never purchases the house,” said John Matthews, president of operations of Chicago Lease to Own. “That is how the scammers out there have used rent-to-own to hurt people. They sell it to those who should never have been in the program and take their portion of the rent every month used ‘for the purchase of their home’ knowing that the tenant will never qualify to buy the home.”

Make sure you know — and are comfortable with — the home’s final sales price and monthly rent payments before you agree to a rent-to-own arrangement. And if you don’t want to pay extra in rent each month for a home that you might never end up buying? A rent-to-own agreement might not be for you.

Owning v. Renting Smackdown

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photo by Agardikevin00

Forbes quoted me in Are You Really Just Throwing Your Money Away When You Rent? It reads, in part,

There are a number of reasons for wanting to buy a home over renting and most are valid. Some people want to buy because their current rental unit may have restrictions on owning a pet, while home ownership would, in most cases, not have this limitation. Others want to diversify their assets beyond the stock market. Still others may be pressured by friends and family – loved ones may claim you are simply throwing your money away if you rent, but with owning, you could be building equity every month.

Is this really true?

You Are Building Equity As A Homeowner, But…

It is true that you are building equity each month as a homeowner. However, the amount of equity you’re building is equivalent to the portion of your monthly mortgage payment that goes toward paying down principal.

Because most mortgages are structured to have a uniform monthly payment for the life of the loan, in practice, this means that your early payments will consist of more interest than principal. So while you are paying down principal and building equity, you may not be building as much as you imagined.

For example, let’s say you had a 30-year fixed rate mortgage with an interest rate of 4% and a starting loan balance of $500,000. Your monthly payment would be $2,387, but just 30% of this payment or $720 would go toward “building equity” during the first month. Over the first five years, less than 35% of your total mortgage payments go toward paying down principal (i.e. about $48,000 out of $143,000 of total payments).

Scott Trench, director of operations at real estate investment social network BiggerPockets, added, “Yes, equity can make you feel good, but it’s not really money you can use freely until you’ve sold the property. And if you end up selling in a down market, you may not end up realizing as much equity as you expected.”

*     *     *

The Transaction Costs Are Large For Buying!

The costs of buying and selling real estate are significant, and those costs don’t go toward building equity either.

“Buying a house entails many transaction costs that add up to three, four, or five percent of the price of the home and sometimes even more,” said David Reiss, a professor who teaches residential real estate at Brooklyn Law School. “Many advise that homebuyers should have at least a five-year time horizon or they risk having those transaction costs eat into any gains they were hoping to get out of the sale of their home. Even worse, those costs can lead to a loss, if the local market is soft.”

 On a $500,000 home purchase, three to five percent of closing costs translates to $15,000 to $25,000 – not an immaterial amount of money. When you ultimately sell your home, you may have to pay another three to five percent in closing costs or more.

That’s why your expected time horizon in a home is one of the most important factors to consider when deciding whether it is the right time for you to buy. A longer time horizon gives your home a better opportunity to realize sufficient price appreciation, to offset those large transaction costs.

Dems Favor Land Use Reform

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photo by DonkeyHotey

The Democratic Party has released its draft 2016 Policy Platform. Its housing platform follows in its entirety. I find the highlighted clause particularly intriguing and discuss it below.

Where Donald Trump rooted for the housing crisis, Democrats will continue to fight for those families who suffered the loss of their homes. We will help those who are working toward a path of financial stability and will put sustainable home ownership into the reach of more families. Democrats will also combat the affordable housing crisis and skyrocketing rents in many parts of the country that are leading too many families and workers to be pushed out of communities where they work.

We will increase the supply of affordable rental housing by expanding incentives and easing local barriers to building new affordable rental housing developments in areas of economic opportunity. We will substantially increase funding for the National Housing Trust Fund to construct, preserve, and rehabilitate millions of affordable housing rental units. Not only will this help address the affordable housing crisis, it will also create millions of good-paying jobs in the process. Democrats also believe that we should provide more federal resources to the people struggling most with unaffordable housing: low-income families, people with disabilities, veterans, and the elderly.

We will reinvigorate federal housing production programs, increase resources to repair public housing, and increase funding for the housing choice voucher program. And we will fight for sufficient funding to end chronic homelessness.

We must make sure that everyone has a fair shot at homeownership. We will lift up more families and keep the housing market robust and inclusive by defending and strengthening the Fair Housing Act. We will also support first time homebuyers, implement credit score reform to make the credit industry work for borrowers and not just lenders, and prevent predatory lending by defending the Consumer Financial Protection Bureau (CFPB). And we will help underwater homeowners by expanding foreclosure mitigation counseling. (4-5, emphasis added)

Much of the housing platform represents a continuation of Democratic policies, such as increased funding for affordable housing, improved enforcement of the Fair Housing Act and expanded access to counseling for distressed homeowners.

But the highlighted clause seems to represent a new direction for the Democratic Party: an acknowledgement that local land use decisions in areas of economic opportunity (read: the Northeast, the Bay Area and similar dynamic regions) are having a negative impact on low- and moderate-income households who are priced out of the housing markets because demand far outstrips supply.

This is a significant development in federal housing policy, flowing from work done by Edward Glaeser and Joseph Gyourko, among others, who have demonstrated the out-sized effect that the innumerable land use decisions made by local governments have had on the availability of affordable housing regionally and nationally.

There is a lot of ambiguity in the phrase “easing local barriers to building new affordable rental housing developments,” but the federal government has a lot of policy tools available to it to do just that. If Democrats are able to implement this aspect of the party platform, it could have a very positive impact on the prospects of households that are priced out of the regions where all the new jobs are being created.

Student Debt And Homeownership

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The National Association of Realtors, along with SALT, a consumer literacy program provided by American Student Assistance, released the results from a joint survey about student debt and homeownership. They found that “Seventy-one percent of non-homeowners repaying their student loans on time believe their debt is stymieing their ability to purchase a home . . ..” They have also produced a cool infographic to illustrate their main points:

  • Nearly a third of current homeowners (31 percent) in the survey said student debt is postponing plans to sell their home and purchase a new one.
  • A little over a majority of those polled (52 percent) expect to be delayed by more than five years from purchasing a home because of repaying their student debt. One in five anticipates being held back three to five years as well as over 60 percent of baby boomers. Not surprisingly, those with higher amounts of student loan debt and those with lower incomes expect to be delayed the longest.
  • Mirroring other recent data on young Americans being more likely to live with their parents than in any other living situations, almost half (46 percent) of young millennials polled currently live with family (both paying and not paying rent).
  • 42 percent of respondents indicated student debt delayed their decision to move out of their family member’s home after college.

I am not convinced that SALT President John Zurick is right when he says, “It is imperative to the nation’s economy that we find immediate and practical solutions to financially empower the 43 million Americans with student debt.” I think SALT and NAR are also overselling their findings somewhat in their press release headline, New Evidence Links Student Debt with Inability to Purchase a Home, because the survey reports subjective beliefs and does not offer any kind of baseline from which we can measure this current snapshot of consumer sentiment.

That being said, there has been a lot of concern about the relationship between student debt and household composition recently. It is certainly worth trying to understand the relationship between all different forms of debt and how they expand and limit choices available to households. And whatever the limitations of this NAR/SALT study, I have no doubt that the system for financing higher education needs an overhaul for its own sake as well as for the impacts it has on other choices that households make.

 

The High Cost of Living in NOLA

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photo by Ken Lund

Occupy.com quoted me in For Struggling Renters in New Orleans, Hope May Be Coming A Bit Late. It opens,

Twenty-four-year old Stuart Marino is a finance major at University of New Orleans with $8,000 in student loan debt and 33 credit hours until graduation. But the alternative to obtaining that diploma is worse. As statistics show, those not having a college degree are much more likely to remain poor. Marino was not fortunate enough to have been born a decade earlier. Then, tuition at UNO was half of what it is now. During Republican Governor Bobby Jindal’s term, from 2007 to 2015, tuition at Louisiana public colleges skyrocketed due to massive budget cuts.

Despite having a job, Marino says he spends more than 30 percent of his income on rent and utilities. He would not be able to cover the cost of a $1,000 medical emergency. Indeed, he has delayed getting his car fixed, something vital to reaching his job and school.

“Fixing my car would be something I would be doing with that $700,” he said, referring to the monthly rent.

Marino’s story personifies what many people here and nationwide have experienced over the last decade as rents in cities and even in urban areas of less than 1 million have soared, exacerbating income inequality while disproportionately affecting racial minorities, the less educated and millennials.

In the last year alone, rents in the U.S. have increased 3 percent, according to Apartment List. In New York City and San Francisco, the median rent has climbed to $4,500 and higher. The cost of living in these cities can be understood as the price, however astronomical, of living in one of the country’s major economic centers, where industries like finance and tech pay high salaries.

But in smaller cities such as Miami and New Orleans, both of which count on tourism as a major source of revenue, more than a third of residents devote 50 percent of their monthly income to rent and utilities, according to Make Room, a campaign by the non-profit Enterprises Inc. that aims to create more affordable housing.

Factor in stagnant wages, a low supply of multi-unit housing, and higher credit requirements post-Recession, and the number of Americans paying 30 percent or more of their gross income on rent and utilities has risen by 22 percent in the past decade. This goes against what financial experts recommend: that people spend no more than 30 percent on basic monthly costs in order to have a cushion in case of catastrophic events like a job loss or a medical emergency.

Working harder is, in most cases, not an option. According to last month’s Bureau of Labor Statistics report, the number of Americans involuntarily working part-time has reached 6 million, and is showing “little movement since November.”

The Housing Crisis in New Orleans

New Orleans has undergone many changes since Hurricane Katrina devastated the city in August 2005. And not all of them have been positive. Sociological studies show that renters are more likely to remain displaced than homeowners. In areas of the city like the Lower 9th Ward, where most residents rented, fewer have returned since Katrina than in neighborhoods where home ownership was predominant – even including those areas that flooded. For those who have returned with few economic resources, many face a long wait for housing; according to the Housing Authority of New Orleans, in September 2015 more than 13,000 people, disproportionally African-American, were still waiting for housing vouchers.

Changing the current housing reality is akin to shoring up the foundation of a home; it can be done, but not easily. “Fundamentally, building housing is costly,” David Reiss, a professor at Brooklyn Law School and an expert in real estate and community development, told Occupy.com.

A free market economy incentivizes people to invest in something only in exchange for profit. That leaves the job of providing affordable housing up to government, but municipalities have moved away from programs establishing dense urban public housing.

Reiss pointed out that vertical expansion could alleviate high rents in urban areas. But many residents, particularly those in historic neighborhoods, don’t want to see large buildings built in their neighborhoods; it’s a NIMBY, or “not in my backyard,” conundrum.

Gentrification in NYC

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Manhattan-plaza

The NYU Furman Center released its annual State of New York City’s Housing and Neighborhoods (2015). This year’s report focused on gentrification:

“Gentrification” has become the accepted term to describe neighborhoods that start off predominantly occupied by households of relatively low socioeconomic status, and then experience an inflow of higher socioeconomic status households. The British sociologist Ruth Glass coined the term in 1964 to describe changes she encountered in formerly working-class London neighborhoods, and sociologists first began applying the term to New York City (and elsewhere) in the 1970s. Since entering the mainstream lexicon, the word “gentrification” is applied broadly and interchangeably to describe a range of neighborhood changes, including rising incomes, changing racial composition, shifting commercial activity, and displacement of original residents. (4)

The reports main findings are

  • While rents only increased modestly in the 1990s, they rose everywhere in the 2000s, most rapidly in the low-income neighborhoods surrounding central Manhattan.
  • Most neighborhoods in New York City regained the population they lost during the 1970s and 1980s, while the population in the average gentrifying neighborhood in 2010 was still 16 percent below its 1970 level.
  • One third of the housing units added in New York City from 2000 to 2010 were added in the city’s 15 gentrifying neighborhoods despite their accounting for only 26 percent of the city’s population.
  • Gentrifying neighborhoods experienced the fastest growth citywide in the number of college graduates, young adults, childless families, non-family households, and white residents between 1990 and 2010-2014. They saw increases in average household income while most other neighborhoods did not.
  • Rent burden has increased for households citywide since 2000, but particularly for low- and moderate-income households in gentrifying and non-gentrifying neighborhoods.
  • The share of recently available rental units affordable to low-income households declined sharply in gentrifying neighborhoods between 2000 and 2010-2014.
  • There was considerable variation among the SBAs [sub-borough areas] classified as gentrifying neighborhoods; for example, among the SBAs classified as gentrifying, the change in average household income between 2000 and 2010-2014 ranged from a decrease of 16 percent to an increase of 41 percent. (4)

The report provides a lot of facts for debates about gentrification that often reflect predetermined ideological viewpoints. The fact that jumped out to me was that a greater percentage of low-income households in non-gentrifying neighborhoods were rent burdened than in gentrifying neighborhoods. (14-15)

This highlights the fact that we face a very big supply problem in the NYC housing market — we need to build a lot more housing if we are going to make a serious dent in this problem. The De Blasio Administration is on board with this — the City Council needs to get on board too.

Lots more of interest in the Furman report — worth curling up with it on a rainy afternoon.

 

The State of Moderate-Income Housing

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photo by Jaksmata

The Center for Housing Policy’s most recent issue of Housing Landscape gives its 2016 Annual Look at The Housing Affordability Challenges of America’s Working Households (my discussion of the Center’s 2015 report is here). it opens,

Millions of working households face big challenges in finding affordable housing, particularly in areas with strong economic growth. In 2014, more than 9.6 million low- and moderate-income working households were severely housing cost burdened. Severely cost burdened households are those that spend more than half of their income on housing costs. Overall, 15 percent of all U.S. households (17.6 million households) had a severe housing cost burden in 2014, with renters facing the biggest affordability challenges. In 2014, 24.2 percent of all renter households were severely burdened compared to 9.7 percent of all owner households. These percentages were even higher for working households, of whom 25.1 percent of renters and 16.2 percent of owners had a severe housing cost burden.

Housing costs continue to rise, particularly for working renters, who saw their median housing costs grow by more than six percent from 2011 to 2014. And for the first time since 2011, housing costs increased for working owner households as well, marking the end of a three-year downward trajectory. Additionally, more working households were renting their homes as opposed to buying—52.6 percent of working households were renters in 2014, up nearly two percentage points from 2011, when the share was 50.8 percent.

With more working households renting their homes, demand for rental housing continues to grow, pushing rents even higher in already high-cost rental markets. And although incomes are growing for many working households, this growth is not always sufficient to offset rising rents, meaning that working renter households are increasingly having to spend a higher proportion of their incomes on housing costs each month. (1)

The report outlines a series of good policy proposals (many of which are politically unfeasible in the current environment) to address this situation. But my main takeaway is that the wages of working-class households “are not sufficient for meeting the cost of adequate housing.” (5) Their housing problem is an income problem.