Tag Archives: renting

Argument: the rise of the American rental economy

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Even though ownership seems engrained in the American psyche, Daniel Gross argues that recent economic troubles are pushing the United States to a rental economy which may just thrive in the years to come:

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they’re OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn’t limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.

While downgrading the place of ownership in the American psyche may sound like a traumatic task, the cold, unsentimental fact about the American dream is that Americans never really owned it in the first place. For the past three decades, especially, consumers haven’t so much bought their quality of life as they’ve borrowed it from banks and credit card companies. And since the Great Recession, Americans have been busy rebuilding their balance sheets and avoiding new financial encumbrances. When American consumers can’t—or won’t—borrow to purchase the goods and services they’ve come to consider part of their standard of living, how does the economy get back on its feet?…

It’s tempting to view the rise of rentership as an economic step backward. Renters can’t build up equity, and they have less control over their living standards than owners. Renting is generally seen as something you do when you’ve failed as a homeowner or are not yet ready to be one. But I’d argue the rise of rentership is a sign of a system adapting—albeit too slowly—to new realities.

The U.S. economy needs the dynamism that renting enables as much as—if not more than—it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can’t easily take his skills to where they are needed in North Dakota or Wyoming if he’s underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership.

An interesting argument.

I wish Gross would explore the implications of this further. Perhaps for the “average” American, renting will make sense  in the future. It has several clear advantages: it doesn’t require one to take on a lot of upfront debt. This is most clear with mortgages: how many people will want to take on that amount of money when conditions can change quickly? (Does this idea about renting have any application for the other popular debt topic these days: college loans?) Second, it allows consumers to pick and choose more. If you are renting with a yearly lease, you have some freedom to adapt to changing circumstances. (There also could be some negative pressures due to rising rents, actions of landlords, etc.) If there is something that Americans like even more than ownership, it is choices. You can also see this trend in media options: we are moving away from a system of ownership to buffet or a la carte models where you can access thousands upon thousands of songs and movies on demand. Third, this seems like a classic American argument: the times are changing and there is money to be made by more quickly seizing on the new realities!

But there could also be some downsides to this. First, someone must still own things like housing units and rights to digital media. Will ownership be consolidated in the hands of a few? What happens if the few want to restrict access to their products? Does a society based more on the renting of housing units inevitably require things like rent control? Second, there is a long cultural history in the United States that ties renting to transience and lack of concern for the local community. For example, many suburban communities have resisted the construction of apartments because the perception is that people who live in apartments don’t contribute long-term to a community in the same way that homeowners do. (Of course, there are other reasons suburbanites resist apartments, including issues of race, class, and property values.) At its most blatant, homeownership was seen as a bulwark against Communism. These cultural biases can be overturned but it won’t necessarily come quickly or easily. Third, are there other aspects of life that would have to change to accommodate a shift to renting? Can widespread renting of homes work in suburbia? Can Zipcar exist in less dense areas? In other words, is this just about renting or about large-scale adjustments to American society based on new realities?

This bears watching. Is this the end of the dream of some of an ownership society?

US government thinking of renting foreclosed homes

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Different people have different opinions about what to do with the glut of foreclosures: perhaps convert them into multi-family units, bulldoze them, or donate them. It appears the federal government might try another route: renting them.

The Federal Housing Finance Agency said Wednesday it is seeking input from investors on how to rent roughly 250,000 homes owned by government-controlled mortgage companies Fannie Mae and Freddie Mac and the Federal Housing Administration. All of the homes are foreclosures…

Converting the homes into rentals may reduce “credit losses and help stabilize neighborhoods and home values,” said Edward DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie and Freddie.

Homes in foreclosure sell at a 20 percent discount on average, which can hurt prices of surrounding homes.

It also might meet the growing demand for rentals. Since the housing meltdown, nearly 3 million households have become renters. At least 3 million more are expected by 2015, according to census data analyzed by Harvard’s Joint Center for Housing Studies and The Associated Press.

This sounds like it could turn into a large program with a lot of moving pieces. Would these homes essentially be converted into temporary public housing?

If done well, this could help deal with a rental problem. Even before the economic crisis, a number of metropolitan areas suffered from issues of affordable housing: there simply were not enough cheaper and good units available. Additionally, there was often a mismatch between where these homes were located and where jobs were located. Could renting these foreclosures be a viable solution?

How many communities would be interested in supporting a program like this? I could imagine some interesting battles within better-off suburbs. On one hand, as the article mentions, foreclosures tend to drag down home values. On the other hand, having the federal government actively involved as a landlord in more neighborhoods would make a lot of people nervous.

Stereotypes of apartment renters

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Americans who are homeowners, whether they own single-family homes, condos, and townhomes, are typically regarded as respectable, hard-working, and upstanding citizens who have sought after the American Dream. But there are different opinions regarding those who rent apartments. Here is an example from Manteca, California:

You rarely see landlords for single family homes that stringent and quite frankly, not all homeowners could pass such muster.

That is why it is a tad absurd that a number of homeowners when confronted with news that someone is proposing a $30 million apartment complex in their neighborhood believe it will be allowed to be occupied by rowdy, inconsiderate slobs, who will park cars all over the adjoining neighborhood and pursue a lifestyle that will drive home prices down.

If you want to see such behavior, there are plenty examples in Manteca neighborhoods – including those built since 2000.

No one is debating that there aren’t examples of somewhat trashy older apartment complexes that let everything go to hell. In Manteca, though, they are fairly rare due to the aggressive stance the city has taken. And in fairness to many owners of smaller and older apartment buildings in town where rents definitely are more affordable they are doing a good job of keeping their complexes in shape and devoid of problem tenants.

To go after single family homes whose tenants create such problems is much more difficult as often a landlord will have only one or two homes and live out of the area.

It is also true that the much more stringent construction and development standards of today make it next to impossible for rents for new complexes to be relatively low. That is why Paseo Apartments starts out at $975 a month for a one bedroom and one bathroom apartment.

In my research on suburban development, I found a number of examples where suburbanites were opposed to apartments because of the type of people who live in apartments. One complaint was about the transient nature of apartment living. The assumption was that single-family homeowners are more rooted in a community while apartment dwellers move more frequently and care less about individual municipalities. Having too many apartments would mean that a greater proportion of residents wouldn’t really care about the community. This was commonly tied to the disruption of a community’s single-family home character

But a second complaint included thoughts about low-income residents and seemed tied at times to race and ethnicity. Since these suburbs were heavily white, apartments were seen as places where less wealthy and non-white residents could live. Such residents might engage in more uncouth behavior, sullying the reputation of idyllic, white suburbs. Apartment complexes are viewed as crime magnets because lower-income, non-white residents are assumed to be more prone to crime.

It sounds like both issues might be taking place in Manteca: even nicer apartment complexes with high rents and amenities are not granted the moral equivalency of a nice single-family home neighborhood. Additionally, the author tries to point out that there is anti-social behavior in single-family homes as well as apartment complexes but this isn’t often recognized.

With all of the talk about more multi-family housing construction, these issues will need to be overcome in many communities.

(Side note: a third complaint about apartments I found is the argument that apartments don’t generate enough tax revenue for the services that will be required. This commonly is tied to school funding as apartments, depending on their price and size, might attract more families who will overburden the schools. So senior apartments might be more likely to be approved than three or four bedroom apartments that will likely draw families to the community.)

Can we expect a multi-family housing construction boom soon?

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Most housing news these days is bad: dropping prices, foreclosures working their way through the system, and a sales slowdown that might continue for some time. But some analysts suggest there may soon be a construction boom in multi-family housing:

But for now, you can see from this chart that overall home building did, indeed, boom during the bubble. Multi-family home building, however, remained pretty consistent between 250,000 and 300,000 structures per year throughout the bubble and declined in late-2009. Single-family building, on the other hand, grew to a rate of about one million homes per year in the mid-1990s to peak close to the rate of two million per year in early 2006. Then, of course, construction plummeted…

From all of this, we can conclude a few things. First, before long, residential construction will have to rise. Although vacancies are high currently, household formation should experience a boom as the economy adds jobs. With it, those vacancies will decline and new homes will be necessary to accommodate the growing population.

Moreover, both reasons for the decline in the rate of household formation indicate a need for more rentals. Young adults who are finally able to move out of their parents’ homes will mostly rent first. They’ll have short credit histories, relatively low wages, and little savings for a down payment. That combination that doesn’t usually spell mortgage approval when underwriting is strict. And those who are living with relatives or friends because they have been unemployed for an extended period will also likely need to rent at first. They might have experienced financial troubles affecting their credit histories, their new wages will often be lower than what they earned before being laid off, and they may have little savings for a down payment if they needed to rely on that money when unemployed. Additionally, all of those millions of Americans who defaulted on their mortgages will have no choice but to rent for quite a while. Banks certainly won’t give them a new mortgage for at least several years.

Now add this into the fact that multi-family construction remained constant during the boom, while single-family construction rose. This could translate into a coming mismatch between the types of housing units available and the specific housing demand that will rise. For the reasons just described, going forward the home ownership rate should fall to and remain at or even below its historical norm, while renting becomes more common. This implies two outcomes. Some single-family homes will need to be converted to rentals and additional multi-family structures need to be built.

The argument here is that the housing slowdown is really about single-family homes since changes in demand, driven by demographic trends including the slowing of household formation, mean that there are not enough multi-family, rental housing units and so we will soon have more multi-family housing construction.

There could be some people who might work against this trend. Recent advertisements from the National Association of Realtors suggest they want to promote single-family homes and homeownership. I wonder how quickly the housing industry could shift to building more rental units even if this is overwhelmingly what consumers desire and would developers and builders reach the profits they want from constructing multi-family units? Additionally, how many suburban communities would approve more multi-family and rental housing that might mar their single-family home character?

Live event tickets and the first sale doctrine

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Daniel Indiviglio over at The Atlantic discusses the potential for eliminating all secondary markets in live event tickets:

If you have ever sold even[t] tickets through the online resale market StubHub, then you may have received an e-mail last week about the dangers of paperless tickets. It cautions that companies “like Ticketmaster” are moving to restrictive paperless ticketing systems, which could kill the secondary market for tickets….According to the Fan Freedom Project, a group speaking out against this product that StubHub links to in its email, there are essentially two kinds:

Restricted transfer (closed-loop system): Primary ticketing agencies have sole control over sales, restricting the transfer of tickets and allowing them to be resold only on their own proprietary exchanges – and with their price restrictions which are often unrelated to the market value of the ticket.

Prohibition of ticket transfer: You purchase paperless tickets with a credit card and must provide the same credit card and a photo ID at the event venue. A swipe of the credit card at the gate produces a slip confirming the location of the reserved seat. The ticket cannot be transferred, sold or given away to another consumer.

Hmm…this sounds suspiciously like book publishers’ plans to undermine libraries and software companies’ recent progress in eliminating the secondary market for software.  Doesn’t anybody want to actually own anything anymore?

Wired’s David Rowan certainly thinks renting rather than owning is the wave of the future, as I discussed in a previous post.  However, Rowan’s analysis focused on the “idling capacity” of personal assets (e.g., a lawnmower that you only use once a week) and how the Internet is helping individuals coordinate more efficient arrangements (e.g., sharing that lawnmower among a wide group of “neighbors”).  The idea here is to increase asset utilization and thus maximize the consumer surplus.  (To round off the example:  lawn mower manufacturers may be upset, but the economy is better off overall since resources are freed for more productive uses than making a ton of lawnmowers that will only be used for 2 hours per week.)

In contrast, eliminating secondary markets in tickets, books, and software only benefits the producer surplus.  It allows de facto monopolies (like Ticketmaster for live event tickets) and copyright monopolies (like those enjoyed by publishers of books and software by virtue of their rightful copyrights) to extend those monopolies over the entire market (since they no longer have to compete with resold tickets, used books, and previously owned software).  Under these circumstances, offering consumers something less than full ownership in their tickets, books, and software doesn’t benefit the economy — it simply increases monopoly, expanding inefficiency and the deadweight loss triangle.

For copyrighted works, the first sale doctrine was supposed to prevent owners from eliminating secondary markets, but that doctrine is under judicial attack.  As for tickets, it remains to be seen whether established industry players like Ticketmaster will be able to further their monopolies by choking off the secondary market.  But it doesn’t look good for consumers — or economic efficiency.

Getting not pwned by technology

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David Rowan over at the UK edition of Wired has an article about the advantages of renting out what you own:

There are assets all around us with high “idling capacity” that are essentially like an ATM machine. People use the extra cash for everything from offsetting car payments to taking the holiday they could not otherwise afford. Collaborative consumption is an easy way to become a micro-entrepreneur.

Rowan argues that the Internet is fundamentally changing the way that people think about ownership:

Now that collaborative spirit [of the sort that launched auction website eBay] is spreading to all sorts of other industries as ubiquitous internet connections bring us together in creative new ways. The peer-to-peer model has lately moved from auction houses and online classifieds to car-sharing, jewelery lending, even online banking — and each time it’s cutting out a traditional incumbent.

In an era when environmental concerns are making conspicuous consumption harder to justify, start-ups are targeting customers keener to pay for access to goods and services rather than actual physical ownership — and new web-based networks are letting all of us be both lenders and borrowers.

As the articles notes, however, such systems can only thrive within an environment of robust trust.  It’s one thing to sell a used laser pointer to a total stranger with the expectation of payment (like eBay’s first sale).  It’s quite another to open one’s dwelling to total strangers who find you through Couchsurfing.

One thing that the Wired article doesn’t address is the official legal barriers to much of these sorts of collaborative activities.  Hospitality, car rentals, banking:  these are highly regulated industries with a host of rules designed to protect incumbents by erecting barriers to entry.  While this may not be a large issue currently, it will be interesting to see how established industry players (or revenue-starved state and local governments) start responding if and when “collaborative consumption” becomes a truly major economic force.

Deciding whether to buy or rent

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One of the New York Times blogs discusses whether residents should buy or own. The decision could be based on a ratio for metropolitan areas that gives some indication of whether owning or renting is a better choice:

A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years.

While the metropolitan average is 15.1, 17 metro areas have ratings over 20 (led by East Bay, CA, Honolulu, HI, San Jose, CA, San Francisco, CA, and Seattle) and 14 metro areas have ratings below 15 (with the five lowest being Pittsburgh, PA, Cleveland, OH, Detroit, MI, Phoenix, AZ, and Dallas – Fort Worth, TX).

The blog writer come to this conclusion about the data: “It’s pretty amazing when you think about it. The country has suffered through a terrible crash in home prices, yet buying a house remains an iffy proposition in many markets.”

While this may be true, what is even more remarkable is that homeownership is still such a widespread goal. If this measure is reliable and valid (meaning that it is consistent and it really tells us something about buying vs. owning), then homeownership might never really be about an economic improvement over renting. Rather, Americans have made owning a home an important cultural value and then use economic rationales to justify their decisions.

What exactly is it that appeals to people about owning their home? They get to make their own decisions, they don’t have to pay a landlord or wait for them to take care of repairs, they get some separation from their neighbors, and overall, they feel like they have made it on their own. If renting was a cheaper option but people could still afford to buy a home, how many Americans would decide to rent?

Why rent when you can own?

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Chris Suellentrop of Wired makes a case for more renting and less owning:

Everything, everywhere, all the time. That’s the dream of the Rentership Society. And we’re almost there. If you want to be able to possess some things, in some places, some of the time, well, keep on buying. But I vote for infinite abundance, on demand. Doesn’t that sound like the new century’s American dream?

This vision seems to revolve around a world of never-ending Internet access that gives people the ability to read, listen to, and watch whatever they want, whenever they want.

But this is also a reminder that American ideas about the defects of renters, particularly when it comes to housing, is a cultural construct:

In the American mind, renters are regarded as an unsavory lot, willful dissidents from the American dream. They do things like put cars up on cinder blocks in their front yard or, worse, live in your basement. The vision of an Ownership Society was about more than just houses, but the promotion of homeownership was, for a time at least, its most successful element.

These ideas about renters could change if we do move as a society away from ownership.