In a note today, BofA/ML analyst Michelle Meyer looks at the state of The American Dream, home-ownership, where it stands now, and where it’s going.
Since the housing bust, Americans have begun a shift towards renting, and Meyer predicts a continuation of that trend for three big reasons.
First, there is still a large backlog of foreclosures – as of the end of 2010, there were 4.3 million homeowners in foreclosure or seriously delinquent – which will naturally become renters. And, this is not the end of the pipeline. There are about 3.5 million mortgages that have received a modification, of which at least half are likely to re-default and enter foreclosure. In addition, there are 1.3 million mortgages 60 days delinquent, and although the pace of new delinquencies has slowed, it is still elevated. We believe it is reasonable to expect nearly 8 million foreclosures to enter the market over the next three years. This means we can expect a steady shift into rentals from foreclosures through 2013.
Second, young adults forming new households are not good candidates for homeownership in this market of incredibly tight lending standards and high unemployment. Not only is in difficult to qualify for a mortgage but the down- payment requirement is higher, which means young adults will need to be liquid and willing to lock-up cash. In addition, purchasing a home reduces labour mobility,
Third, the recession has greatly impaired household net worth and lowered income, making it more difficult for current renters to transition to homeowners…