Do tenants get hurt in a down market?

In the ongoing discussion that seems to rage daily on the Seattle RE blogs between the “industry experts” (like http://blog.seattlepi.nwsource.com/realestate/) and the “bubbleheads” (for example http://seattlebubble.com/blog/) over whether to rent or buy in Seattle’s market, there’s (amazingly) one point that hasn’t been pounded upon, which struck me today as I caught up on the weekend’s reading.  

In Friday’s Wall Street Journal (November 23rd, 2007), there was an article entitled: “Tenants Pay as Landlords Default,” by reporter Kelly Evans.  I think it’s a subscription only feature online, but here’s an excerpt (someone please tell me if it’s a copyright violation to give credited excerpts!):

As U.S. foreclosures soar, renters — especially in small apartment buildings and single-family homes — are paying a high price for their landlords’ financial troubles. Across the U.S., thousands of people are being evicted.

Renters are particularly vulnerable now for a couple of reasons. As lending standards were relaxed in recent years, more people snapped up properties that they rented out, or partly rented out. When they couldn’t make their mortgage payments — sometimes because their adjustable-rate mortgages reset to higher rates — the properties ended up in foreclosure. In most places in the U.S., that voids tenants’ leases.

There’s much to be said about the non-economic benefit of owning — pride of ownership, roots in a community, the ability to paint your walls pink or to have a cat without asking permission.  With the U.S. homeownership rate at an historic high, close to 70%, there must be something attractive to the idea, beyond just the hope for appreciation and the desire to grab hold of the interest deduction.  (And it’s not just the fast money of the recent ill-advised loans that has driven this — back in ’96, when you still had to qualify for your mortgage, the rate was still high at 65%).  After owning my own home since ’91, I can’t imagine NOT owning — and the economics have little to do with it.  

But maybe one of the best reasons for owning is under the heading of “control your own destiny.”  What’s the benefit of not having your rent increased at the whim of your landlord?  Of being able to do with your home what you want to do?  Or as this WSJ article points out, of simply being assured of a place to live in exchange for the rent you pay?  Imagine moving into a house or apartment, signing a year’s lease, paying first and last month’s rent plus a damage deposit, unpacking, hanging your pictures, ordering cable, enrolling your kids in school, then getting an eviction notice posted to your front door.  And the foreclosing lender, your new landlord, has no obligation to honor your lease because the foreclosure, over which you had NO CONTROL, voided that lease?

Sure, this might be a rare thing.  As a small sampling, our company manages 1800 small rental units in and near Seattle — the type of homes in which the WSJ cites there may be a higher risk of foreclosure/eviction, as they’re owned by individual, small investors.  And in 16 years, we’ve never had an tenant get displaced due to foreclosure.  But the topic did make the Journal.  So clearly, it is happening, and it’s an interesting and tragic side effect of this changed market.  

Which begs another question:  Maybe it’s the TENANTS who should be asking for the credit reports?

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