Implications of a disastrous monetary policy. (Part 2 of 2)
In my last post, I explored how rent prices could be affected by the latest Federal Reserve announcements. Judging by the amount of positive feedback I received via Facebook and email, I really hit a nerve!
While rent prices probably won’t increase drastically in the near term (1-2 years), they could be significantly affected within 5 years. Many different factors could spur this including: Increased credit standards for mortgages, decreased demand for buying a home, and inflation.
The truth is, there is no predictable or easy answer to how rent prices will fluctuate in the coming years. An economist is better suited to give answers on this complex subject.
Since I don’t have an Economics degree or Wharton MBA, I interviewed someone who does! Mr. Richard Finger is also a regular Forbes contributor and his work, in its entirety can be found here:
Josh: How do you foresee the Fed’s policy affecting rental housing prices and demand in the near term?
Richard: “The Fed policy in my opinion is somewhat political. I believe part of the reason Bernanke keeps rates so artificially low is he does not want the house to come crashing down on his watch. He does not want to saddle the government with hundreds of billions in extra interest expense on our $17 trillion debt. Even with current Fed policy of QE 3 buying $85 billion per month and low mortgage rates there still don’t seem to be enough qualified buyers in the market to absorb all the houses, new and existing, that are on the market. A qualified buyer in my mind is one who can make a down payment of at least 15 to 20 percent of the home purchase price. A great percentage of home sales are done with gimmicky 3 percent down payment mortgages. Therefore, the rental market should stay robust in the near term. There is a saying in real estate that there are three kinds of markets: Those that are too restrictive to build in, those that are overbuilt, and those that are being overbuilt. In Houston, where I live, the inner city rental market is great for the landlord right now…….but you should see all the new construction……I suspect we will be oversupplied with apartments in 18 to 24 months.”
Josh: How do you foresee mortgage interest rates, and subsequently demand, being affected by the Fed in the next 5 years?
Richard: “Five years is an eternity. As I said in my article inflation is a monetary phenomenon…….if you print enough there will be inflation. With money printing on this scale, inflation cannot be avoided indefinitely. We have avoided inflation thus far because there has been a very low “velocity of money”. Money is not moving through the economy……banks aren’t lending, new business formation is low, and existing business are skittish about expansion. As velocity picks up the U.S. will have inflation which will drive up interest rates making mortgages more expensive and hurting the purchase side of housing market. This will be good for the rental market. As mentioned above some markets will for sure be overbuilt with rental units to varying degrees. My opinion is that as time passes more and more people will rent rather than own. Home ownership rates are down and to my way of thinking that will be the trend for the foreseeable future.”
So there you have it… Through the eyes of a Forbes author, the hot rental housing market is here to stay, and possibly accelerate!
Now its your turn. I would like to know, how does the market outlook affect your view on buying a house versus renting?
Are you more likely to become a landlord?
Looking forward to hearing your thoughts! If you have a question, leave it in the comments below and perhaps Mr. Finger will be kind enough to answer. :-)