US Housing Market: Will We Become A Nation Of Renters?

With non-performing loans rising at but not limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Comerica (CMA) and FifthThird (FITB), and despite a stagnant retail housing market, real estate sales of foreclosed homes are booming as a result of international investors stepping up to the plate.

Why? In some markets, homes are now going for $10,000 versus the highs of 10x that amount just a couple of years ago. In some of Detroit’s markets, prices below $1 have been recorded in order to attract investors. This has resulted in investors flying in from China, the United Kingdom, Australia, etc. to browse the markets. These investors are not looking for one or five homes, but upwards of 100 or more — basically every decent and cheap home available.

Simply, if the house costs less than $20,000 and can be rehabbed for under $30,000, and taxes total about four months of the $900 per month in rent (government subsidized), would yield a 15% or better annual return, excluding depreciation.

While existing homeowners have experienced some benefit from the vacant homes around them being fixed up and occupied, their home’s value remains underwater. Though out-of-town investors have rescued homes from abandonment, absentee landlords and renters can hurt a neighborhood, as they are not generally worried about cosmetic repairs, cutting the grass, snow removal and the like.

Even though foreign investors can see value in investing in US homes now, that does not mean prices would not continue to be under pressure. At least the annual benefits from depreciating the assets and government subsidy of the renters should more than offset any potential downside; however, that does not mean there will be any potential buyers in the future.

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