How foreclosures may strain the rental market

With more homes going into foreclosure, many people are entering or reentering the rental market. We spoke with Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, about the effect this will have. Retsinas is editor of the forthcoming book “Revisiting Rental Housing: Policies, Programs, and Priorities.”

Question: With a significant number of homes going into foreclosure, will there be -- or has there been -- a discernible effect on the rental market?

Answer: All those owners are now becoming renters, and Economics 101 goes into effect.

If you have high demand and a restrained supply the only result is higher prices.

In the near term, you will also see rents go up. People, who in the past could qualify for homeownership, will no longer have access to those sub-prime mortgage products and now will become renters.

Question: When will all this occur?

Answer: I expect that we will see rents rising steadily over the next two to three years -- possibly even into the next five years.

That will be offset a little because some of those foreclosed properties will not be able to be sold and some of them will be converted into rentals.

Question: Compared with other states, is the rental market here reacting any differently to the foreclosures?

Answer: I think California is a particularly interesting case because it still has a growing population. That is in large measure due to record immigration over the last seven or eight years. Those immigrant families . . . might have in the past gotten very low-interest-rate mortgages, but today those are not available.

So instead of buying a home, they are going to have to stay in the rental market, and that will also drive up prices.

Question: Do you think people who are going through foreclosures in Los Angeles or in other expensive markets are likely to move to more affordable markets out of state?

Answer: It is a case-by-case situation. It usually depends on a couple of things. The career of that person is usually the biggest factor in whether they move to another state. But by definition, foreclosures transform owners into distressed renters looking for affordable places to live.

Question: When will people going through foreclosures try to become owners again?

Answer: Foreclosures represent the end of a long line of missed payments. As a result, credit scores plummet, making it unlikely that they will qualify for a mortgage and become homeowners again in the near future. The experience will also be a wake-up call that owning a home is not without risk. We need to make people more aware of those risks.

The housing finance system bears responsibility too. The problem in the recent past is that we had so many incentives to buy.

The question is not if someone can buy a home but if they can sustain in owning a home over time.

More emphasis needs to be put on that.

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