Morgan Stanley predicts foreclosed homeowners will pay $72B in rent annually
The millions of homeowners facing default on their mortgages will likely become renters once their home is foreclosed. Investment bank Morgan Stanley (MS) crunched the numbers and said the boost to the multifamily segment, that arm of commercial real estate that includes apartment buildings, will most likely see a multibillion-dollar boost from the looming migration. Oliver Chang, a housing and securitized products analyst at Morgan Stanley, the lead author of a report released this week, detailed the migration of ownership to rentals. He expects a drop in the U.S. homeownership rate to 60% in the coming years from 69% at its peak. The rate tumbled to 65% from a decade ago, the Census Bureau reported this month. It's the largest drop in 70 years. According to RealtyTrac, there have been 8.9 million homes lost to foreclosure since 2007, the height of the credit crisis. And there is more to come in the fallout. Chang said there are roughly 7.5 million households either in foreclosure or delinquent on the mortgage. With the majority of these borrowers forced to pay rent over the next five years as their credit heals, this would equal $72.7 billion in incremental rent payments instead of mortgage payments. The government is moving ahead to take advantage of the increase in demand. It's currently developing strategies to rent more of the thousands of government-owned foreclosure properties. "Burned by the worst housing downturn in history, more households are choosing to rent instead of owning a home," Chang wrote. He went on to describe a shift in the focal point of the economy from manufacturing to services. In the latter, Chang said, workers value mobility, and renting provides the opportunity to pursue employment more so than owning a home. "While traditional drivers like job growth and rent-buy dynamic clearly explain part of the resurgence in demand — the vibrant snap-back in apartment fundamentals in the past year has been augmented by the shifting attitudes in consumers towards renting," Chang said. The mortgage industry refutes this idea and is at work tackling its plethora of problems and shortcomings. They range from what some call overly restrictive lending standards on the origination side, a dormant private-label secondary market, and ongoing issues in servicing. At the Mortgage Bankers Association conference in Chicago earlier this month, the trade group's new CEO David Stevens refuted the claim that the desire to own a home in the U.S. was dead. "We have first and foremost an obligation to restore trust with the consumer and ensure that when they buy a home the products they are qualified for will be built on safe and sound standards over the long term," Stevens said. Write to Jon Prior. Follow him on Twitter @JonAPrior.