Still, this upturn in housing is different from the boom. Back then, private and government-backed lenders, convinced that home prices would never fall, were eager to help Americans achieve their dream of homeownership by lending on ever easier terms. The proportion of households that own their own home rose from 65% in 1995 to 69% in 2006. Since then it has fallen back to 65.5%, and Laurie Goodman, an analyst with Amherst Securities, reckons it would be 63.3% after excluding 2.8m homeowners who are in, or probably heading towards, foreclosure.
The number of homes in foreclosure is still painfully high and could, in fact, pick up in the coming months. Lenders had held back while dealing with charges of mishandling the paperwork, but settled those charges with state and federal officials in February. Moreover, some 11.3m homeowners with a mortgage, 24% of the total, owe more than their house is worth, putting them at greater risk of delinquency. Nonetheless, CoreLogic, a research firm, notes that those numbers are now edging down as home prices, which are rising in 19 out of 20 big cities, pick up. With time, then, the $692 billion of “negative equity” now weighing down borrowers should also shrink.
High unemployment has temporarily depressed the underlying demand for homes; new household formation is running well below its long-term trend of 1.3m per year, according to Ivy Zelman, an independent housing analyst.
In the meantime, many households have decided to rent. Traditionally such people have chosen apartments, but a growing share are now renting single-family houses. Ms Zelman’s firm reckons that, between 2005 and 2011, the number of households that owned a house fell by roughly half a million; the number that owned or rented an apartment rose by 2.5m; and the number that rented a house shot up by 3.2m, an increase of 27%.
The National Association of Realtors reckons that about 30% of sales of existing homes are now to all-cash buyers, up from 20% in 2009. Most of these buyers are investors. These are predominantly small players, many of whom are planning to rent for only a few years until they can sell the property for a profit. That was originally Mr Schmitz’s plan. It changed when he met his first ten tenants. “It was an ‘Aha’ moment. They were 85% married, two jobs, two kids, two cars, a dog, a garage full of stuff, a house full of furniture,” he says. “We said this is not an apartment dweller, this is a renter that didn’t exist prior to the crash—because prior to the crash, if you could fog a mirror someone would lend you $300,000 to buy a house.”
One of Mr Schmitz’s tenants, Paula, had bought a house in 2007. She and her husband picked out every detail, from the site to the cabinet knobs, and watched it being built, slab by slab. After the recession hit, her husband, a trucker, saw his business dry up and his costs soar with the price of fuel. They fell behind on their payments and, to avoid foreclosure, sold the house for little more than a third of what they paid in a “short sale” just before Christmas in 2010. “I was sick to my stomach,” she recalled. But when Mr Schmitz, the buyer, asked if she and her husband would like to remain as tenants, it was “our Christmas miracle. It was win-win.” Their rent is now roughly half their original mortgage payment, and “We kept our dignity.”
As a tenant she doesn’t have to worry about big repairs, but she also has no voice in the local homeowners’ association. She hopes to be a homeowner again once her finances are set to rights, though she has also concluded that owning a home with no equity is overrated. “You spend half your life paying that mortgage and it’s nobody’s home until that mortgage is paid off.” Mr Schmitz is convinced that this is a permanent part of the new residential property market. Many investors seem to agree; in May, his firm raised $224m from investors to plough into new purchases.
Rentals may provide a boost for housing now, but they probably will not do so over the long term. Returns for landlords are attractive, because homes can be bought for so much less than the cost of building them. But as the stock of foreclosed properties shrinks, prices will normalise. Ms Zelman says most people renting houses now would own them if they had the income and the credit. One survey last year found that 81% of adults still consider a home the best long-term investment, down only slightly from 1991 despite all that has happened.
These days, though, banks demand bigger down-payments and better credit scores to lessen the risk of having to buy back a delinquent loan from Fannie Mae and Freddie Mac, the now government-controlled agencies that securitise and guarantee most residential mortgages. It could be a while before many homeowners can realise that dream.