Rents Increasing: What Should You Do?

The good news is the housing market is coming back with increases in sales prices and lower inventory. The bad news is some apartment rents are going through the roof.

Rents increased an average of 5.4% between June 2011 and June 2012, according to new findings by real estate website Trulia, and in cities such as San Francisco, Boston, Denver and Miami, rental prices have jumped more than 10% over the past year.

A Reuters article reports that recent data from real estate research firm Reis shows rents increasing at the highest rate since 2007. The average asking rent is now $1,091 per month nationwide. In the most expensive market, New York City, that average is $2,935.

Ouch.

Today, we’ll take a look at some of the factors driving rents upward, and suggestions for how to handle this trend:

Why Rents Are Rising

Right now, there’s plenty of demand for rentals, and not enough vacancies. Here are three big reasons why:

• The flood of foreclosures in recent years has forced a number of former homeowners into the rental market.
• An easing employment market has enabled people who may have been living with family or roommates to seek out places of their own.
• Renters who may be thinking of buying a home are biding their time because of the volatile state of the economy and the fact that lenders are pickier about who qualifies for a mortgage these days.

While there’s all this demand, the supply of apartments hasn’t kept up. According to Reis, only about 38,000 new apartment units were built in 2011, the smallest number in more than 30 years. And the current apartment vacancy rate is just 4.7%, the lowest it’s been since 2001.

Should You Buy?

While rent prices are shooting up, housing price increases have been relatively flat until recently. As a result, it might be tempting to stop ponying up cash to a landlord and invest in a home of your own. Consider these factors before going house-hunting:

• Are you planning to keep the house for five years or more? When factoring in closing costs and real estate fees, that’s about how long it takes for buying to really pay off, according to this interactive New York Times graphic.
• Is your job situation stable? Of course, nothing is certain, but you should be sure you are established in your current position and confident you have the skills, experience and connections to find another job so you can always keep making mortgage payments.
• What are the housing prices in your area like? Trulia uses a formula to determine where buying makes the most financial sense. They divide the typical house price in an area by the typical yearly rental price to get a ratio. If this number is under 15, they consider buying to be less expensive than renting. As of March, 98 of the 100 markets they analyzed had low price-to-rent ratios; San Francisco and Honolulu were the exceptions. And although the greater New York/New Jersey market had a low price-to-rent ratio, it’s still cheaper to rent than to buy in Manhattan.

How to Manage Higher Rents

If buying is not for you at the moment, here are some ways to deal with rising rents:

Rent To Own

For many, the rent-to-own home may be the best option. Also called a lease-to-own house, the process works similarly to a car lease: Renters pay a certain amount each month to live in the house, and at the end of a set period -- generally within three years -- they have the option to buy the house. Each month of rent they pay is income for the seller, while a portion of it goes toward a down payment to eventually buy the home.

Rent Within Your Reach

There’s nothing worse than trying to pay for more home than you can afford. And in general, your rent should never be more than 30% of your net take-home pay. Why? Because it saps your ability to meet your other financial goals, like saving for retirement and building an emergency fund. Also, the stress of coming up short—or just squeaking by each month—can’t be overestimated. Do a quick calculation to see whether your current housing falls within these bounds. If not, you might want to seriously consider the next point—your ability to negotiate down your rent—or an option to seek out a cheaper living space.

Negotiate With Your Landlord

If you receive a rent increase you feel is unreasonable, sharpen your negotiating skills. If you pay your rent on time, don’t have loud parties and don’t hassle the landlord every time you find a chip in the paint, he or she is going to be more likely to want you to stay. Offer to agree to a longer lease term to keep rent increases down. Try to find comparable rentals with lower rents to politely bring to your landlord’s attention.

Adjust Your Budget

Your essential expenses —what you pay for basics like rent, food, utilities and commuting should take up no more than half your take-home pay. So if your rent goes up, you need to reduce what you spend on the other fundamentals. For instance, walking, biking or carpooling to work could trim transportation expenses; remembering to bring your lunch with you to work more often could significantly trim your food costs. If rent is still breaking your budget after you’ve overhauled your essential spending, you might consider finding a roommate to lower expenses.

Cut Your Costs

After adjusting your essential expenses, dig deeper and figure out what other costs you can cut. Daily outdoor runs might be a nice change of pace from a gym membership. A handmade scrapbook for a friend’s birthday could be a much more thoughtful and lasting gift than just another scarf or handbag.

If rents keep going up—and right now, that’s the forecast—more people may decide to buy, reducing demand and resetting rental prices. In the meantime, stay on track with your financial goals by finding ways to manage this big monthly expense.

Low down-payments are back as lenders ease rules

As housing heads into the critical spring market, credit is finally beginning to thaw. Lenders are increasingly approving low down payment loans, and government sponsored mortgage giant Fannie Mae is buying more of them.

It is a noticeable shift from the last four years, when 20 percent down on a home purchase loan was the only game in the neighborhood.

"In general lenders have been willing to do more than they may have been willing to do in the past," said John Forlines, chief credit officer for Fannie Mae's single family business. "Our requirements have not changed significantly, but other parties taking risk, the lenders and mortgage insurance companies in particular, have been more flexible than they may have been in the past."

Fannie Mae will buy loans with as little as 3 percent down payment, but these loans require private mortgage insurance. At Sound Mortgage, Inc. we now have a new Fannie Mae no mortgage insurance product for only 5% down payment for purchases with a min. 740 FICO score. Contact me for the details 

During the worst of the housing crash, when the private insurers were sinking under billions of dollars in claims on defaulted loans, that insurance was tough to get.

The only low down payment loan left was through the Federal Housing Administration (FHA)—the government's loan insurer. The FHA took on a huge share of the market, far more than it was ever meant to, and while that helped prop up the mortgage market in the short term, it was not sustainable, and the FHA took on huge losses.

Now, facing a $16 billion shortfall, the FHA has raised premiums and will raise them yet again next month. FHA loans are becoming increasingly expensive.

Meanwhile, as the housing market improves, private mortgage insurers are starting to remove overlays on higher loan-to-value loans, meaning the percentage of the home value that is mortgaged. Low LTV's and high credit scores were the rule recently for the private insurers, but that may now be loosening, making these loans cheaper than FHA.

"FHA is certainly becoming more expensive," noted Craig Strent, CEO of Apex Home Loans in Bethesda, Maryland. "The increase in low down payments is reflective of first time buyers coming off the sidelines and entering the market. We're going to see more of this trend in the next couple of years as the economy improves and renters start to once again see the benefit of buying over renting. FHA has become more expensive and the mortgage insurance companies are the beneficiary of that, which is really not a bad thing as it means the private market is insuring the lower down payments rather than the government."

The stocks of mortgage insurers like MGIC and Radian spiked in the first months of this year, as home prices improved and FHA policy changes designed to shrink its share of the market were announced. There is currently a bipartisan effort in the U.S. Senate to reduce the FHA's role, and in the House of Representatives a hearing is being held Wednesday looking at, "the competitive advantages the Federal Housing Administration has relative to private mortgage insurers and how those advantages contribute to the crowding out of private capital in housing finance," according to the House Financial Services Committee release.

Despite the advantages, FHA's share is already shrinking, as Fannie Mae's is rising. In the first quarter of 2012, loans with between 3 and 10 percent down payment made up 15 percent of Fannie Mae's business for home purchase loans (not refinances). In the second quarter it rose to 17 percent and in the third to 18 percent. Fannie Mae has not reported its fourth quarter yet, but that share is expected to rise again. While a credit thaw is part of it, as mortgage interest rates rise and fewer borrowers apply to refinance, lenders are simply looking for more business.

The banks are also catching their collective breath now after years of raging refinances. Record-low mortgage rates had borrowers refinancing over and over, and that left little capacity or need for the banks to take on more work in the form of home purchase loans.

With rates now rising to the highest level in six months, according to a report from the Mortgage Bankers Association Wednesday, the banks are seeing fewer refinances.

"Lenders, as traditionally happens, as they have more capacity, they might be willing to stretch their credit limits more," said Forlines.

Lenders may also be responding to clearer guidelines from Fannie Mae on how it will determine which defaulted loans it can force the banks to buy back. Banks had to buy back billions of dollars worth of bad loans during the housing crash due to failures in so-called "reps and warrants" (representations and warranties) on loans it sold to Fannie Mae.

They are also just responding to more business, particularly from first time home buyers who have been largely on the sidelines until now. Improving employment and more confidence in home prices are bringing these buyers back. Since first-time buyers tend to be younger, they may not have large down payments.

"More first time buyers are coming into the market now and we have seen this more in our pre-approvals in terms of comparing FHA vs. PMI," noted Strent. "Conventional options with PMI will become even more attractive when FHA premiums increase on April 1."

One wild card, however, is looming mortgage rules from Federal regulators that could require a minimum down payment for a loan to be considered a "qualified mortgage." Only these loans could be sold in full to investors; otherwise lenders would have to hold some portion of the loans on their books. Given new rules recently announced by the Consumer Financial Protection Bureau, industry organizations are lobbying heavily against that minimum down payment.

The idea behind the new mortgage regulations are to get lenders to have more skin in the game in order to prevent the reckless lending that brought on the housing crash. This as borrowers are apparently needing less skin in the game now to buy a home.