More owners are open to the idea of roommates within their homes and adjustable-rate mortgages to help cover surging expenses.
Renting Out Rooms, Basements, Attics to Help Offset Costs
The number of buyers who considered renting out a portion of their homes for rental income increased to 31% in 2021 from 24% in 2019, according to Zillow’s consumer housing trends report.
“That increase in homeowners becoming residential landlords is consistent with the trend we see of buyers coming from a younger generation of side-hustlers aging into the housing market, said Zillow economist Manny Garcia.
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Renting Out Spare Rooms a Good Side Hustle
Homeowners are renting out spare rooms for extra cash. Take a look at the generational specifics to help cover the following expenses:
Total Gen Z Millenials Gen X Boomers
Mortgage/Insurance 29% 24% 33% 29% 27%
Food/Car/Commute 35% 33% 31% 36% 41%
Family Vacation 16% 16% 22% 18% 7%
Extra for Savings 53% 53% 56% 52% 52%
Extra for Spending 37% 37% 41% 36% 35%
Some homeowners are now renting out spare rooms in their home to keep up with expenses that are rising with inflation. George Ratiu, senior economist with Realtor.com, said, “Affordability was already squeezing people. It’s natural to think of their biggest asset – their home – as a potential income source.”
Sharing a home is not a stretch for younger generations who are used to sharing “everything” with strangers thanks to ride sharing with Uber and short-term vacation rentals with Airbnb.
According to a 2021 Realtor.com study, 67% of Millennials and 57% of Gen Zers said they were willing to share their homes with strangers for cash compared to just 34% of Boomers.
Homebuyers Also Demanding Adjustable-Rate Mortgages
Home buyers are showing more demand for mortgages…not just 30-year fixed-rate mortgages with rates increasing to 5.53% last week but for adjustable-rate mortgages (ARMs) with rates at 4.47%.
According to the Mortgage Bankers Association (MBA), overall mortgage purchase applications increased +5% w/w last week. The share of ARMs within that +5% uptick was a whopping 11% of overall mortgage loans and 19% of mortgage dollar volume…a 14-year high!
While homebuyers are “making it work” by becoming residential landlords in their own homes and by taking out 5-, 7-, or 10-year adjustable-rate mortgages to take advantage of ARMs comparatively lower interest rates, current homeowners are not particularly interested in refinancing. In fact, there is a very small pool of homeowners with mortgages that could actually benefit from refinancing. Why? At least 90% of those homeowners ready refinanced their mortgages when interest rates were low enough to make a positive difference in their monthly mortgage payments. Those days are gone…refinancing dropped -2% w/w last week and -72% y/y, according to the MBA.
Effects of a Next Rate Hike
If/when the 30-year fixed-rate conventional mortgage rate hits 5.75% as interest rates continue rising, the mortgage payment on an average home would be $1,867/month if the homebuyers put down a 20% down payment.
If those same homebuyers put down a 10% down payment, their 30-year fixed-rate mortgage payment on an average home would be $2,000/month, according to the MBA.
Food For Thought – Buy-to-Rent Common in UK
Buying a home with the intention of renting out a room or two, while still uncommon in the US, is actually a normal practice in the UK. William Neville-Smith, senior residential sales consultant with the UK real estate company Hamptons, said, “A lot of first-time buyers consider buying a two-bedroom to split the bills and secure income for their mortgages.”
A banking and finance industry group UK Finance indicated that the volume of buy-to-let mortgages, a loan type for homebuyers intending to rent some or all of their property, was up +83% y/y in 2021. That increased volume represented about $23B or 18B pounds. The government lends its support of these buy-to-let mortgages by allowing residential landlords to earn up to 7,500 pounds/year tax-free for leasing out a furnished room in their homes.
Could such a buy-to-rent practice fully supported by lenders and the government come to the US?
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