Accidental Landlords Could Boost Inventories

Between April of 2006 and April of 2011, the median home price fell 27.6%. However, the median price rebounded 19.7% over the subsequent two years. While many formerly underwater homeowners are just now getting their first shot at taking advantage of record affordability, others who opted to rent their properties will now be able to sell them, releasing much needed inventory to the market.

The month’s supply of homes for sale reached a 9-year low in March of 4.3 months, well below the 6.5 months typical of a balance market. This figure rose to 5.2 months in April with the normal seasonal increase, but was still 21.2% below the figure from a year earlier. While tight inventories can drive price growth, excessively stringent supplies can create headwinds to demand as consumers are priced out of the market or left with inadequate options.

At the peak, roughly 12.1 million homeowners were underwater on their mortgages owing more than their property was worth. Insufficient equity could preclude owners from buying a larger property to facilitate a growing family or hamper a sale to take advantage of a job opportunity in another market. Likewise, defaulting on a mortgage or short selling, even with agreement from a bank, could damage one’s credit score preventing another purchase for three to seven years.

Not all underwater homeowners were equity constrained, though. Some owners were able to rent their original properties and put together enough money for another home purchase. What’s more, the expansion of availability of the FHA’s low down payment program helped facilitate this process, enabling mobility and fluidity in the market for these accidental landlords.

Since the 4th quarter of 2011, steady price gains have unlocked roughly 1.7 million from negative equity positions. This improvement has allowed many underwater owners and landlords to sell without a loss of equity or without taking a hit on their credit score. A homeowner who sells their home in order to buy another would not create a net addition to inventories, but a landlord who sells would.

Although rents are strong and opportunities like HARP exist for accidental landlords to refinance at record low mortgage rates, not all owners are cut out to be landlords or they may have more productive uses for their equity. For instance, an owner with an FHA mortgage might want to buy down principle on their primary property in order to avoid the hefty mortgage insurance on FHA mortgages. Regardless, many owners of rental properties will now have the opportunity to unwind this position, bringing new inventory to the market that would be a welcome addition to current supplies.

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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