Accidental Landlords
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I’ve watched the housing boom and bust with great interest. I got into the market in 2004, just in time for the big action. I watched the value of my house more than double and then drop to below what we paid.
I live in a small subdivision with about 100 homes. It’s laid out in such a way that everyone lives on a cul-de-sac. It’s a housing boom kind of neighborhood, newly built McMansions on tiny lots. The idea was to pack as many houses into as little space as possible. But hey, I love my house and I’m happy with my purchase, even after the bust.
I have 11 houses on my cul-de-sac. I’ve gotten into the habit of taking the temperature of the housing market by looking out side my front window. At first everyone was very happy. Prices were going up. Home equity lines of credit financed backyard landscaping and expensive cars. No one sold or moved. It was a newly built neighborhood so we had all just moved in. No one was looking to move again so quickly. A few babies were born, life was good.
Then prices started to falter. Three of the 11 foreclosed. Another one tried to sell but couldn’t face the reality of the new prices and never put the price low enough. Yet another one got a job offer in another state and had to sell at $75,000 below the highest price our houses had seen. I was actually kind of upset with them for selling their house at these fire sale prices. “They are just bringing everyone’s values down with that price!” Looking back, they did the right thing. That house is now worth $135,000 less than they sold it for.
At one point 5 of the 11 houses were for sale. One was bought by an investor and is now a rental property. Two sold eventually as primary residences. The other two never sold and are currently rented out by the original owners.
One more house of the 11 was also eventually rented out by the owners. They wanted to move but didn’t even try to sell because they were so upside down on the mortgage, thanks to a non-existant down payment and a home equity line of credit. Was the fancy backyard landscaping was worth being stuck with a house they can’t sell?
Which leads me to my point. The accidental landlord. Out of the 11 houses on my cul-de-sac 3 are currently being rented because the owner is upside down on the mortgage and cant’ sell. I also know three other people who are accidental landlords.
My whole life I’ve never really known anyone who was a landlord and now I know six people who are renting out their homes while waiting to be able to sell them. I only know the financials of three of those six. Two are breaking even and one is losing a little bit each month. That’s not a horrible situation, but it’s not good either. It tells me that as soon as they can sell, they will. They are taking on risk with little reward.
So what does that mean for the housing market. Obviously, this is an itty bitty tiny sample of people and I’m no real estate expert, but to me it says prices aren’t going anywhere for a while. Why? Because there are a whole lot of homes that aren’t on the market but that need to be sold. I guess this is what they are calling ”shadow inventory”. These homes will trickle onto the market bit by bit and keep prices down. Demand won’t ever have a chance to push prices up because the supply will always be there with yet another house on the market.
Another little trend I’ve noticed in the last few months in my little cul-de-sac is families doubling up. We now have two houses that have two full families living there. I don’t know if this is the new reality or just coincidence in my neighborhood, but it’s interesting.
What’s going on in your neck of the woods?
Ashley
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Comments
Bad situation. But, being an accidental landlord is a great idea. They can fully deduct interest expenses, depreciation and losses from their income taxes. You can’t get those benefits as a resident.
I’ve watched this with interest too. Our neighborhood was built in the late 70′s, and was comprised of maybe 50% original owners and 50% newcomers. During the boom, probably a third of the houses went up for sale. Mostly original owners cashing out during the enormous run up in prices, I suspect. Then came the foreclosures, but only a couple that I noticed on our street. Now it’s leveled out, with no super-noticeable changes. I was on Realtor.com the other day though and was surprised to see just how few houses are for sale in our city.
People in our neighborhood still seem to be in denial about what the value of their house is now. Houses for sale are listed at unrealistically high prices.
In my son’s neighborhood of homes built about 12 years ago, there are 3 or 4 houses that have been for sale for over a year. A few others used to be on the market, but were withdrawn because of no buyers. It seems that the original owners are still living them at this time. The shadow market is definitley there in this neighborhood of about 50 homes.
You are right that it will take years still to work through all the inventory. There are still homes that need to be foreclosed upon that will have to find their way to the market plus all the houses that people want to sell and can’t. I read an estimate that there are 1 million more houses than needed right now. I guess that would mean we need some population growth and family formation to take up the slack.
Nice observations.
IN our neighborhood, it looks like just a few houses were foreclosed. At any one point during the past 2 years, there weren’t more than one or two homes for sale.
Of course, I don’t know what kind of struggles the neighbors are going through to keep their houses. We are in an older, rural type area so many of the homeowners probably had reasonable mortgages and aren’t upside down on them.
I agree with you. It will take so many years to work through the current inventory along with all of the homes in the “shadow inventory” that you mentioned!
Many people are still not willing to take an honest look at the facts when it comes to housing.
The good news is that our own local housing market largely avoided the price run-ups of the past decade… The bad news is that our local housing market largely avoided the price runups of the past decade…
The good news is they were not foreclosed! It is not a good sign for the economy that 2 families are living in a house meant for one. The economy is sort of teetering on the edge. Many people have it a lot better and many do not. Until there is stability we will be teetering for a while. The problem is it doesn’t take much to push you over. My local market is better, but still teetering.