Renters in Crisis

Renters Face Inflation on Many Different Fronts

In these uncertain times one thing is for sure. You’ll have more trouble finding a place to rent in 2008 because the supply is diminishing proportionate to the increasing number of foreclosures.

More Americans are entering the rental market as millions either sell to avoid mortgage debt or lose their homes to foreclosure through outright default. But increased demand meets with a shorter supply, because before the recent housing crunch most developers and builders concentrated on single family homes instead of apartments and other types of rental construction. And many former apartment buildings, for example, were intentionally converted into privately owned condos, reducing the number of rentals on the market today.

So shopping for a rented or leased home in 2008 can be cause for sticker shock as landlords raise prices and hold a commanding upper hand over tenants. As the market for buying and selling becomes a strong buyer’s market, the rental side of the housing industry reacts in the opposite direction by becoming a seller’s - i.e. landlord’s - paradise.

And inflation is attacking renters not just on the housing front, but on all sides. Groceries are pricier, credit card debt is unwieldy, layoffs are on the rise, and the cost of energy as we enter an energy-consuming summer season is off the charts.

• According to AAA, gas prices have risen more than 10 percent from a month ago and now - at $4 a gallon - they are nearly 30 percent higher than they were a year ago. But to put things into perspective remember that the average price for a gallon of gasoline back in the good old days of 2000 was $1.59.
• Visits to the doctor and prescription medications are much more expensive for 8,500,000 Americans who had some form of health insurance six years ago and now have none whatsoever.
• The Fed has cut rates to the bone to boost mortgage and housing markets. While that has failed to save the economy it has succeeded in making the dollar weaker. Over the past few years the US dollar has lost 45 percent of its value relative to the euro, according to the Federal Reserve.
• As the dollar weakens, it buys less. That drives up inflation even as we endure recessionary economic conditions and a shortage of affordable housing - especially in the rental sector.

For those who can afford to buy a home, the average inflation-adjusted property tax was 13 percent higher in 2005 than it was in 2000, according to data from the Commerce Department. That means that landlords are passing that increase along to their renters, another factor that drives rents higher.

But renting as a national trend is also on the rise. The Center for Housing Policy in Washington, DC compared housing costs in more than 200 cities and discovered that even those workers in the fastest-growing occupations cannot afford to buy a home. Registered nurses, for example, were priced out of homes in more than half of the markets surveyed in the study - a startling revelation considering that they make more money than all the other workers included in the broad study of about half a dozen occupations. Unable to buy, these workers rent, and that adds competition to an already heated market.

Another confirmation of expensive housing comes the Housing Affordability Index, which measures the cost of housing against median family income. The National Association of Realtors calculates the index assuming a 20 percent down payment and a traditional 30-year fixed-rate mortgage.

In 2000, the index indicated that most families had about 30 percent more income than was required to buy a home. In other words they could buy and still have 30 percent of their money left over to sock away as savings for a rainy day. By last year, however, that positive statistic had been almost completely erased - despite the fact that family incomes grew by more than 16 percent during the same timeframe of 2000-2007.

Meanwhile the average homeowner is paying 15 cents on the dollar just to service debt, so any incidental increase in income for those who still have jobs has been essentially cancelled out. The savings rate of the average household dipped into negative territory last year for the first time since the Great Depression, and since then consumer inflation has cut into savings even more drastically. And unemployment is higher than it has been in nearly 20 years.

A glimpse into the poverty demographic offers more insightfully gloomy news:

The official poverty level of  $20,614 for a family of four is based on calculations that haven’t changed since the mid-1960s. Yes, it is adjusted for inflation. But 40 years ago the poverty rate in the USA was calculated as slightly half of the median household income. In recent years it was calculated instead as only 28 percent of the median household income - excluding more than 20 percent of the people who would have been considered poverty stricken by the old math.

Many say that’s just a sneaky way to cut funding for the poorest Americans while also keeping taxes low for the wealthiest group. Others say it’s just a generous way to make us feel better about our financial situation and not depressed by our slide into poverty. The number crunchers just haven’t adjusted the definition of poverty - or responsible debt - to keep up with these disingenuous debt-ridden times. So if you’re a renter feeling especially poor in 2008, chances are you really are.

Regardless of the controversy and politics surrounding how policymakers define poverty, most Americans would agree that it is reminiscent of the mathematical approach used by mortgage lenders. Lenders managed to artificially tweak ratios of income and assets to housing costs, and that, in turn, enabled us to buy houses for tens of thousands of dollars more than we could actually afford. We were poor but our mortgage lenders convinced us that we were rich, and now our temporary status upgrades and those low introductory teaser rates that made it happen have both expired.

Today the repercussions are our new reality, and it’s a stark and disconcerting one that looks like it is here for the long and painful haul. Better seek shelter fast - and be prepared to pay more for it as your tardy entrance fee to the world of renting and leasing.

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Family Pets: Another victim of the foreclosure crisis

USAToday recently reported that domestic animals are another victim of the foreclosure crisis. Alarming numbers of them are left behind by distressed homeowners who have to abandon their homes in a hurry. They just leave the pets to avoid the added burden of responsibility. But mortgage lenders and banks are not about to go into the pet sitting business, so the animals are turned over to shelters.

Rescue groups and animal shelters throughout the USA have reported a spike in abandonment. In response, the Humane Society - the nation’s largest animal protection organization - established a special campaign to raise and distribute extra funds for shelters that are overwhelmed by the number of pets displaced by this foreclosure-related phenomenon.

Some people leave pets behind out of sheer neglect, but many do so because they have to leave their homes under duress and do not have time to find new rental homes that will accept pets. Most landlords do not allow cats or dogs, for example, and as more homeowners convert to renters due to foreclosure, the availability of pet-friendly rental properties is in very short supply.

Another contributing factor is that those who do live in pet-friendly rented or leased properties are also getting displaced. Large numbers of foreclosures involve rental properties, and when the foreclosure happens the tenants are usually evicted - which means that they, too, must shop around for a new place to live. Frequently the family pets are the first - and some would say most innocent - casualties in the crisis.

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Tips for Renters: The Importance of a Walk-Through Inventory Punch List

After you find a home, apartment, or condo to rent and sign the paperwork to move in, it is time to relax and enjoy yourself after the hard work of the move. But don’t be too quick to arrange that bubble bath or pop the champagne in celebration. First of all you should take an inventory of the condition of the premises, document it, and get your landlord to sign off on the description or “punch list” of items that might be in disrepair. Otherwise in a year or two when you get ready to move out you might be asked to forfeit your security deposit for problems that were already there when you moved in and are really not your responsibility.

Here’s how it works. When you rent a car at the airport, for example, most car rental agencies first do what they call a “walk-around” of the vehicle. They literally walk around it with a clipboard in hand and jot down notes related to the condition of the car. Maybe it has a ding in the door, a crack in the windshield, or only half as much gasoline as it is supposed to have in the tank. This process protects both the renter and the car rental company, because it ensures that you don’t pay for scratches or upholstery stains caused by the last person to use the car. Similarly, if you return the car with a bashed bumper and the walk-around report shows that the bumper was fine when you drove off the lot, the rental company has evidence and can charge you to fix it.

The same thing applies to renting a home, and it is a great idea to ensure fairness to everyone involved. Realtors who specialize in rentals and leases even have standardized move-in forms that both the renter and the landlord sign and date. They list all items and their current condition before you move into a place, so that you are not held responsible for damage to the rental that was done before you signed the lease. If your new landlord doesn’t have one of these move-in forms, you should ask him or her to get one from a neighborhood real estate office. Any friendly real estate broker will likely give you a photocopied form to use, just to win your business so that if you decide to rent or buy in the future you’ll give them a call.

But if you can’t get an official form, just make your own. Dedicate one page of a legal pad to each room in the house, and don’t forget to include closets, attics, basements, balconies, and other out-of-the-way spaces. Go through each room with the landlord and jot down notes about any telltale stains, nail holes, broken fixtures, leaky faucets, missing doorknobs, scuffed hardwoods, non-working appliances, or other items of interest. Both of you agree to it, sign it, date it, and keep a copy. When it’s time to move out just compare the condition of the home to the move-in description. You are never legally responsible for normal wear and tear, but significant problems can result in ugly misunderstandings. Having a good move-in inventory solves those kinds of problems long before they have a chance to happen and is a win-win for both renters and landlords.

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Are Tenants Collateral Damage?

In the battle of landlords to survive rising taxes and plummeting equity, tenants are often regarded - and discarded - as just another number or a means to a more profitable end. Investors make ends meet at any cost. Tenants suffer evictions and loss of deposits and paid rent.

Real estate agent Wendy Smith of Clearwater Florida made an interesting observation lately that she posted on the Active Rain Real Estate Network blog.

“Many investors in our area have seen their cash flow eaten up with higher property taxes and insurance costs. These days if you can break-even on a rental, you’re doing pretty good,” she wrote.

What that means for renters is that - especially in popular regions of the country that have a higher cost of living or in areas where insurance claims due to floods, fires, and hurricanes have caused homeowner insurance inflation - landlords are under mounting financial pressure. It is one thing to try to break even on a rental property under normal conditions, but quite another to meet the challenge with shrinking profit margins.

Most investors are happy to break even, because that means the tenant is paying the mortgage and the investor is getting a free ride to accumulated equity. But in some places property taxes have risen dramatically because taxing authorities have finally gotten around to updating appraisal data. Funny how they get busy doing that when real estate prices soar, but when your house is worth less they continue to base your taxes on stale, outdated figures so they can rake in the extra tax dollars.

For those who think taxes are chump change and could not possibly be the straw that breaks the investor’s back in terms of profitability, consider this example:

A friend of mine owns a rather rustic old cabin on the St. John’s River in FL. It has been in her family for generations, ever since her granddad built it for a few thousand dollars as a vacation home. Now it’s in one of the most desirable locations in the region, and - luckily for my friend - the property is worth more than a million bucks. So she’s happy to hold on to it, but the property taxes have now gone up to about $60,000 a year. For now she has it rented to a tenant who makes enough to afford paying $5,000 a month for a rustic dwelling, but without the tenant she can’t afford to pay the taxes and will lose the home. Local developers who want the property keep pressing for higher taxes, a strategy that often works quite well by chasing off the original owners of property - many of whom live on a limited retirement pension income. Then the developers come in and buy up their tax foreclosure homes for a song.

Tax appraisals typically lag the markets by as much as 2-3 years; so many homeowners (and investors) are now finally getting hit with higher taxes based on valuations from 2-3 years ago. But that was when the market peaked and now their properties are worth much less than they were then, their adjustable rate mortgage payments have doubled or tripled, and now they are being asked to set aside huge tax escrows.

Break-even strategies based on normal margins get blown out of the water. The professional investors - especially those savvy ones who are protected by placing their properties in a corporation so that their personal assets are not at risk - often find it smarter and more profitable to walk away and let the mortgage lender pick up the pieces.

Meanwhile the tenant becomes discarded as “collateral damage” as the landlord investor pockets as many payments and deposits as possible to pay off the taxing authorities and make a clean getaway with no lingering tax implications.

But in today’s chaotic housing and mortgage market environment it’s all accepted as just part of the cost of doing business. If you’re a tenant caught in the crossfire, many landlords say it’s your tough luck. Some callous and calculating investors believe that’s what you deserve for not buying your own home to help support the American Way, instead of depending upon them to provide a roof over your head.

The irony is that they spout that philosophy to justify evicting you without feeling guilty, so they really have to right to claim that they are providing a roof over anybody’s head but their own.

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Renters in Crisis

These are times that could rival historic financial downturns. Words such as recession and depression are discussed in our financial districts, offices, and homes around the country… and world. Then, there is how our government addresses it, and avoids answering the questions.

As in most difficult times in history, those that have plenty of money experience little of the effect. But, those that live on the edge of their financial limits or take risk to expand their wealth or living standard feel the most impact.

Renters, those that become tenants of other people’s property typically fall into the second category. Even with a fair amount of wealth, tenants are always subject to the control (or lack of control) of the landlord. In our real estate climate today, owners are even finding themselves suddenly thrust into becoming tenants due to a rapidly escalated mortgage rate or failure to make their payments. Foreclosure has become a very strong factor in our economy today for mortgage companies, banks, home owners, and yes… tenants.

Tenants, or renters, have always been subject to unscrupulous landlords, increasing rents, and limited property protections. There are, of course, a lot of other difficulties renters face because they don’t own the property where they live. In our current times, renters face new threats to their homes and families as many landlords find themselves hard pressed to maintain their mortgages. As the rental market changes, who knows what other challenges will rise for renters.

Renters in Crisis is a blog about the challenges, threats, and risks of renting in our economy today. We will present a variety of articles and discussions about these renter challenges.

Enjoy our posts and join in our discussions.

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