More Sellers Becoming Landlords

In Chicago renting is often a very good alternative to buying. In the short run it will often be cheaper – aside from all the softer benefits of buying a home. However, if renting is such a good deal then the flip side must also be true: renting is not such a good deal for the landlord. Typically, the rent doesn’t cover the landlord’s expenses. So why do people become landlords then? Because historically they’ve made up for the initial shortfall with recurring rent increases and long term price appreciation. Of course, those days are gone.

Yet, in this market, discouraged sellers are turning to renting when they discover that they can’t sell their homes for what they believe they are worth. In just the last few weeks I’ve encountered no less than 4 different home sellers who are going down that yellow brick road. The reasons vary, but usually fall into one of these two categories:

• They have lost so much money on their home that they would have to write a check at closing. They have ruled out a short sale because they don’t want to destroy their credit rating but they don’t have enough money to bring to closing. Therefore, it’s easier for them to just lose some money each month – effectively converting the lump sum payment into a monthly payment.
• They believe the housing market will be better down the road and consider the monthly loss to be an investment.

So after noticing this anecdotal preponderance of accidental landlords I decided to check to see if in fact this was part of a bigger trend and indeed it was. Here is the data for the following neighborhoods:

• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• The Loop
• Near North Side
• Near South Side
• Near West Side
• North Center
• West Town

The graph shows new rental listings during several months of 2008 and 2009. As you can clearly see 2009 has been running way ahead of 2008 – as much as 72% higher in some months. However, I’m not quite sure what I should make of the fact that November hasn’t grown as much as previous months. Perhaps it’s a seasonal affect – people just don’t try to rent their homes out at this time of the year, though all my anecdotal sellers were trying to do exactly that.

And in case you are wondering, I did do some random spot checks and determined that the surge in Chicago rental listings is not simply driven by large developments coming on line. These all appear to be onsies and twosies.

So…one could take this as a bearish sign that there is all this “shadow inventory” out there waiting to be sold at some point in the future. But I take a decidedly different view of this. Namely, sellers have reached their limit in price reductions and will wait this out rather than go any lower. While this certainly will prevent prices from rising any time soon it also may represent a “support level” in housing prices. When the supply is withdrawn from the market it’s hard for prices to go much lower.