The Rental Pool

The number of rental households fell in the decade leading up to the housing bubble year.  Way too many people became homeowners, many with easy loans that overstretched their budget, which then led to the subsequent downfall.

Since the collapse of the housing market, rental household figures have been steadily rising.  There are now nearly 38 million rental households, which is 4.3 million more than in 2005.  This means that there are more potential renters who could be turned into owners.  However, some of the recent renters are likely to have damaged credit scores after foreclosures and some are facing just plain tough financial times during the current difficult economy.  So there will be a sizable number of renters who cannot and should not become homeowners.  However, given the recent fall in home values and great affordability conditions, there in fact could be more qualifying renters who could become homeowners now than there were a few years ago.  If renters focus specifically on lower-priced homes and not the medium-priced ones, then it would increase their potential for qualifying to get a mortgage even more.

The Federal Reserve data says that renters have about $4,000 in net worth, principally the money the renters have saved up on average.  However, there is no good data on the distribution of savings among renters, such as how many of the renters have $20,000 in their savings account and how many have only a couple of quarters behind the couch cushion.

With this data limitation in mind, the table below applies a simple math exercise to the potential pool of rental households who could buy a median priced home.

Assuming renters would be able to scrape together a 10 percent down payment, in 2005 during the height of the bubble, only 21 percent of renters had the necessary income (by imposing the stipulation that only 25 percent of income can go towards a mortgage payment) to become a homeowner.  Today, the qualifying pool has jumped to 39 percent.  In other words, when you see an apartment complex, and wonder how many of those renters can buy a median priced home, about 2 in 10 could in 2005.  Today, 4 in 10 are poised to become homeowners.

Again, this is only a scenario analysis to provide comparison from the bubble years to today’s market conditions.  The numbers are, moreover, computed for national median home prices.  If one had used a lower-priced home (and not middle price) then the bottom line figures will change, though the underlying story of the greatly enlarged pool available now versus in 2005 would not fundamentally change.   This would also be the same if one had applied local housing data rather than the national price data.

The bottom line is that there are likely to be sizably more qualified renter households who could become homeowners today versus what had been the case in the past few years.  It also means that REALTORS who specialize in sending out marketing fliers to apartment complexes are likely to get more interest than before.

Note: the above analysis is not to imply that sending out marketing fliers will yield results.  Every REALTOR® has their own way of doing business, and some ways are better than others.  The above analysis is only to imply that there is likely to be, on average, a better outcome in today’s market than in recent past years.  Also, as noted in the latest REALTOR® survey results, with more utilizing social networking sites such as Facebook and Twitter, there may be better, low-cost options for marketing to renters than to spend money on hard copy marketing flyer materials.