Rents Seen Rising as Poor Credit Hurts Homeownership Demand

Americans are slightly more upbeat about owning a home and the housing market in general than they were at the end of 2010, accordingrnto the latest National Housing Survey released by Fannie Mae.  However, they still lack confidence in the overall economy. </p

“Despite moderate signs ofrnimprovement in the housing market and the overall economy, consumer attitudesrncontinue to be shaped by ongoing concerns about the recovery and their ownrnfinancial situations,” said Doug Duncan, Vice President and ChiefrnEconomist of Fannie Mae. “Uncertainty regarding the improving laborrnmarket, expectations of little home price and interest rate movement, andrnrising household expenses has left consumers feeling less financially securernand translates into weak mortgage demand. While we have seen indications ofrnimproving economic activity in recent months, especially the strengthening ofrnprivate sector employment, consumers’ attitudes improved only marginally, andrnin some areas not at all, from a year ago, reflecting the continued unevennessrnand uncertainty of this recovery.” </p

One-third of respondents think the U.S.rneconomy is on the right track but this is up from 29 percent last quarter andrnis the highest percentage recorded in the survey to date.  When it comes to housing prices, 30 percentrnexpect prices to improve over the next year, up four points from Q4 while 48rnpercent think they will remain the same and 17 percent expect furtherrnlosses.  On average the expectation wasrnfor a 0.9 percent increase compared to an estimate of 0.4 percent in thernprevious survey.  Rents are expected tornincrease by 43 percent of respondents compared to 39 percent in Q4 and the average increase isrnexpected to be 3.2 percent up from 2.8 percent last quarter.</p

Americans cite income, creditrnhistory and down payment as the biggest obstacles to homeownership with creditrnhistory being the top reason given by renters. rnSeventy-one percent of delinquent borrowers and 41 percent of rentersrnfeel their income is insufficient to meet their current expenses.</p

Sixty-seven percent of respondentsrnbelieve it is a good time to buy a house compared to 65 percent in the lastrnsurvey but three percentage points below the responses in the first quarter ofrn2010.  Sixty-six percent said theyrnbelieve buying a home is a safe investment, an improvement of 2 points since Q4rn2010 but 17 percent below the responses in 2003.  Even though opinions of the safety ofrnhomeownership have declined fairly steadily since the 2003 survey, 57 percentrnstill feel that a home has potential as an investment and outranks otherrnalternatives.</p

Among all respondents buying a home was thoughtrnsuperior to renting by 87 percent, an increase of 3 points from Q4.  This opinion however was shared by only 74rnpercent of renters, a decrease of 13 points in one quarter.</p

As in the last survey, respondentsrncontinue to rank non-financial considerations such as having a good place tornraise and educate children (78 percent) and safety (76 percent) as driving therndesire to own.  Only 63 percent listedrnthe perception that renting is a poor investment.</p

Less than half (44 percent) ofrnhomeowners think their home is worth at least 20 percent more than they paidrnfor it, down from 46 percent in June and 51 percent in January of last year.  The number of homeowners who believe theirrnmortgages are underwater has dropped from 30 percent to 23 percent but thernnumber of homeowners who say they are stressed by this has increased from 35 torn46 percent.  Still, 90 percent of thosernwho are underwater have not considered defaulting on their mortgage but 27rnpercent think it is OK to do so if faced by financial distress.  This is an increase of 13 points since thernfirst quarter of 2010.  Most (87 percent)rnof Americans disapprove of defaulting even if the mortgage is underwater or thernowner is facing financial distress, a number that remains fairly constant.</p

Only 20 percent of those surveyedrnsaid their income has increased significantly over the last year while 59rnpercent reported it essentially unchanged and 47 percent said it isrnsignificantly lower.  When asked if theyrnexpect this aspect of their lives to improve over the next year 42 percent saidrnyes, an increase of 2 points while 15 percent, a decrease of 2 points said theyrnexpected it to get worse.</p

Monthly household expenses arernsignificantly higher than a year ago for 40 percent of respondents, up from 34rnpercent last quarter and 31 percent a year ago. rnAmong delinquent borrowers 47 percent reported higher expenses.  The report noted that there was a 9 pointrnspike in March in the number of all Americans reporting higher expensesrncompared to the previous two months in the quarter.</p

Among delinquent borrowers one-thirdrnhave considered defaulting on their mortgages compared to only 5 percent of allrnmortgage holders and 20 percent said they have seriously considered it.  Forty-four percent of delinquent borrowersrnsay they would be more likely to rent their next home than buy, up 4 pointsrnfrom one year earlier.  The averagerndelinquent borrower pays 11.6 percent more of his income on mortgage payments thanrnall mortgage borrowers.</p

A majority of renters (65 percent)rnsay they would buy at some point in the future even though they are more likelyrnto continue renting after their next move; 31 percent say they will alwaysrnrent, down 3 points from last quarter. rnFour out of five renters say that buying a home would entail making arnfinancial sacrifice and 61 percent of minority respondents called it a “greatrndeal” of sacrifice.</p

Americans cite income, creditrnhistory and down payment as the biggest obstacles to homeownership with creditrnhistory being the top reason given by renters. rnSeventy-one percent of delinquent borrowers and 41 percent of rentersrnfeel their income is insufficient to meet their current expenses.</p

African Americans are morernoptimistic about the survey topics than the general public; 61 percent expectrntheir personal finances to improve in the next year compared to 42 percent ofrnthe general population and 44 percent think the economy is on the right trackrncompared to 33 percent of the larger sample. rnHispanics showed similar optimism with 59 percent expecting anrnimprovement in personal finances and 74 percent viewing home ownership as arngood way to build up wealth compared to 59 percent of the general population.</p

Generation Y respondents, those 18rnto 34 years of age, were also more upbeat than others with 59 percent expectingrnan improvement in personal finances and 62 percent perceiving home ownership asrna safe investment.     </p

Fannie Mae first conducted this surveyrnin 2003 and has conducted it quarterly since the beginning of last year.  The current survey covers the first quarterrnof 2011 and involves telephone interviews with 3,403 Americans over the age ofrn18.  A 3,003 case random sample includedrn781 outright homeowners, 841 renters and 1,261 mortgage borrowers, 297 of whom selfrnidentified as underwater, i.e. owing at least 5 percent more on their mortgagernthan the value of their home.  There wasrnan additional random oversample of 400 delinquent borrowers included in thernsurvey.

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