Question Details

Ken Shuman, Home Owner in San Francisco, CA

How does the expiring housing tax credit effect the multi-family and rental industry?

Asked by Ken Shuman, San Francisco, CA Fri Apr 30, 2010

During the past year, first-time homebuyers accounted for 40% to 50% of all homes purchased. This means they were leaving their rentals behind and moving into home ownership. Now that tax credit is getting ready to expire is the multi-family industry rejoicing?

On the flip-side, I have to imagine the flood of foreclosures is also a reason for concern for the industry. More cheap entry levels homes will hit the market and these are attractive to current renters but you could argue that all the folks that are losing their homes now enter into the renter market.

How does these events effect the rental market and the outlook for the industry.

Help the community by answering this question:


Larry Lichtman’s answer
The tax credit had little effect on multi-unit building sales. Very few buyers of duplexes, triplexes and quads were buying to live in these buildings. The credit was only offered to buyers of primary residences. Could someone buy a quad, live in one and rent three out? Yes, of course. But not many did over the last year. Typically buyers must have 20-30% cash to put down for financing these types of units. Investors who have cash liquidity are in the driver's seat now and can cherry pick some great deals.

The rental market is getting stronger with more people now looking or being forced to rent. Many prospective buyers can't get approved for the amount they want to buy that dream house. Rents in Philadelphia are starting to increase again. Demand is tremendous for rentals in Southeast Philadelphia. Inventory is being leased much more quickly than last year.

At the same time, the luxury market rents are coming down. Too many unsold, foreclosed, and auctioned condos sit vacant and are now or will soon become rentals.
1 vote Thank Flag Link Tue May 11, 2010
Very good question, and--frankly--an interesting analysis of the possibilities.

I don't have the statistics at hand. But even if you're correct that first-time homebuyers accounted for 40%-50% of all homes purchased, the first question I'd ask is: How does that differ from past years? I'd certainly guess it's up a bit. But by how much? In other words, to what extent did the tax credit distort historic patterns? I'd guess some, but not too much.

And your other point is valid: all the folks who lost their homes via foreclosures or short sales have to live some place. Most probably ended up in rental units. So you kind of end up with a revolving door, just turning a bit faster: More new home buyers coming into the market, but at the same time a large number of former home owners coming into the rental market.

And you often see those offsetting trends. Back a few years ago, before the bubble burst, nearly anyone could buy a home, so you saw a lot of people--many unqualified--buying. And that did drive prices up. But that also meant that rentals, comparatively, became a lot more affordable (and thus a lot more attractive).

I'd guess that, overall, the rental market will benefit some in the years ahead. After all, the tax credit did expire. And the folks who lost their homes to short sales and foreclosures need to live some place. There are always kids getting out of school who need a place to live. And, finally, somewhat longer term, interest rates are almost certain to go up, making it more difficult for some people to purchase.

Again, good question.

Hope that helps.
1 vote Thank Flag Link Fri Apr 30, 2010
Don Tepper, Real Estate Pro in Burke, VA
HI Kent, great question that many are trying to figure out. The "Rental" market is different for each area just like the housing market. The economy in each area also affects the rental market. For example Michigan has one of the highest foreclosure rates in the nation for the past two years. The economy of Michigan also affects the buyer and rental market.
As you astutely recognized the 40+% percent of home sales has based on depressed home sales. The other issue affecting the rental market is the doubling up of friends and family into apartments to save money. This creates a lower occupancy rate, since more people are in the same unit, fewer units are being rented. As the occupancy rate goes down so does the monthly rent rate. Here we have seen an 8% drop in average rent rates.
Multi-family investors, unless owner occupied did not qualify for the tax credit so the investor market will be similar to before the tax credit expiration. Those that understand lower costs to purchase will purchase. The economy has created opportunity and fear...knowledge is power. Thanks for the question Ken.
0 votes Thank Flag Link Thu May 13, 2010
FYI, the buyer's credit has been extended for Veterans.

The federal homebuyer tax credits have been extended by one year for qualified service members ordered on official extended duty. The extension applies to first-time as well as repeat buyers.

Learn more at

As for the flood of foreclosures and other market conditions time will tell how the scenario will play out. Those foreclosed upon are being offered the right to rent back (in some cases). Interest rates are still historically low and banks have been open to considering options. Considering your statistic of large numbers of first time buyers entering the market home sales could remain steady.

No firm answer here but that is my point.

Sandy Miller
Real Estate Broker
0 votes Thank Flag Link Wed May 12, 2010
The folks that I have dealt with didn't focus on using the tax credits as a reason to either buy their 1st home or to take advantage of the current homeowner tax credit. Everyone took their time and didn't feel like they were under the gun to find something before the tax credits expired. The multi-families I dealt with were sold to existing apartment building owners who wished to move their money into a better scenario. The tax credit advantage had no bearing whatsoever.

Town & Country, Realtors
1162 Union St.
Bangor,ME 04401
0 votes Thank Flag Link Wed May 12, 2010
Since the Fed tax credit expired, I think there would fewer first time buyers in the market, so fewer would leave the rental market, besides those who are in process of losing their home would soon joint rental market. Although we are seeing drop in rental income due to recent economy down turn, it is not enough to create any wave. And let's not forget that up to four units are categorized as single family resident, when one of those go to forclosure there would be four families looking for rental.
0 votes Thank Flag Link Wed May 12, 2010
Because there is so much room for price negotiation. The tax credit didn't seem to be a big motivator in getting 1st time buyers to get off the fence and find a home.

In case you haven't heard. Coldwell Banker made an innovative move in offering their own version of the $8,000 tax credit. The only difference is we don't have so many restrictions.
0 votes Thank Flag Link Wed May 12, 2010
"It is really too soon to determine what impact the tax credit expiring will have on the market." as Betsy said.
We did not have a huge market in my area for those only buying due to the tax credit. There are many homes available and prices are historically low along with still low interest rates. If you are able to and want to buy - start looking now before those interest rates creep up.
Web Reference:
0 votes Thank Flag Link Wed May 12, 2010
Our rental section is running about 95% full at this time and has for about the last 6 - 8 Months. We have had a very low foreclosure rate in the Spearfish area and the "bubble" was not as inflated as other areas. Our values have decreased 10 - 15% and as long as employment stays strong in this area, I think our housing market will stay consistent.
0 votes Thank Flag Link Wed May 12, 2010
Didn't want my screen to bounce so I had to end and continue. The Rental Market in my opinion to date has not adjusted down in the same degree that the houses did so it makes much more sense to buy. I think the rental prices will not change much due the to fact that many of the renters are people who lost their home. Because we will be going through this until 2012, I expect there to still be a demand for rentals. I will be curious to see what happens at that point. Currently there is alot of demand and as you know supply and demand control prices. In addition with bad credit now the investors will be taking a bigger risk renting to them and I think that also will be reflected in the price. The bigger the risk the higher the price. therefore... I do not expect the rent prices to change by any earth shattering decree.
0 votes Thank Flag Link Wed May 12, 2010
I do not think it will have a great effect on the current market. Most of my buyers would have purchased either way, very few only purchase with that being the driving factor. Now... did it get them off the fence sooner... maybe. I think what will be a bigger factor is price, economy, and the amount of forecloseures that hit the market and how hard the banks work with buyers under water(not great results so far). In our area we have been in an inclining market for about 10 months now.

Every time I turn my head it is new rules, new responses to market, changes in a free for all (everyone making their own rules) so with that in mind... my crystal ball tells me, watch.... adjust to whatever changes come my way and tell people to expect to stay put for a while after they buy and this too shall pass and step up to the plate and do my absolute best for my clients for whatever conditions exsist at the time. Look at history and know we have been here before, don't stop living... just give it more thought before making your decision unless it is a bank owned (lol).
0 votes Thank Flag Link Wed May 12, 2010
Multi-family units are in a category of their own, and very few owners also live there. That was one of the requirements for the first-time homebuyers credit. Though rental units and multi-family units do go hand in hand, I do see a drop in rental prices, especially in this area since so many qualified buyers have bought while others got into the game late, or just couldn't find suitable housing. Renters are renters for a reason in this area, either good or bad, but tenants are offering less for the units and landlords are accepting after long periods of vacancy.
0 votes Thank Flag Link Wed May 12, 2010
It's hard to say, so many factors to consider. The first time homebuyers have been out in force just to take advantage of the tax credit. I ran into difficulty finding suitable housing because most of the homes were REO's and there was so much competition and over bidding involved, that my buyers were priced right out of the competition. Very sad really. So those who were unable to find any thing will have to continue to rent. Also, those homeowners who are losing their homes will need housing, so this will put more of a demand on the lease market. Coldwell Banker has come up with a marketing plan for our homesellers to continue to offer buyers up to $10,000 back to help pay for points, pre-paids and closing costs in an attempt to assist these first time home buyers even further and hopefully help those who were unable to find homes, be able to find suitable housing. This is being done on a voluntary basis with our sellers.
0 votes Thank Flag Link Tue May 11, 2010
It is really too soon to determine what impact the tax credit expiring will have on the market. Interest rates continue to be historically low and there are many bargins to be had, it is still a good time to buy in my opinion.
0 votes Thank Flag Link Mon May 10, 2010
I believe there will be more demand for rentals. They are getting stricter with lending money so there will be fewer buyers and those who lose their homes due to foreclosure will also look to rent.If someone is looking to buy properties and rent them out, it is a good time to buy.
Web Reference:
0 votes Thank Flag Link Mon May 10, 2010
I think the general thought is that many potential buyers that are currently renters may not be suficiently enticed to become homebuyers upon expiration of the tax credits. I would imagine that might certainly have some impact, however, the home purchase environment is very strong even without the home buyer tax credit. Interest rates below 6%, home prices delflated all create a great buying environment. Since the tax credit does not financially create more buyers in the home buying pool, I would not think that any significant change in the rental environment will exist. the renter population is constantly being renewed with younger people leaving home, newly employed workers, etc.
0 votes Thank Flag Link Fri May 7, 2010
Great Question; the expiring housing tax credit should have a positive affect on the rental market. Young prospects won't have a "sense of urgency" to pursue buying, and will stay in the rental market "short term".
But with rentals increasing, and Home Sale Prices Decreasing, we are nearing a point where it is "cheaper" for a person to OWN over Renting!
Web Reference:
0 votes Thank Flag Link Fri May 7, 2010
From the very short time between the nearing of the end of the tax credit, (around April 15th when folks were scrambling with little hope) till now, I can say that I have not seen a sharp decline in new buyer's interest. I think we'll see the continuation of the first time homebuyer market because it's still economically feasible to buy with historic low rates and prices. There may be a relaxing...a welcome lack of panic - but the interest is still strong. Rental demand is still very high - I am the VP and broker of a good sized property management company (700+ units) as well as a sales Realtor. In the past several months, even as the flight of renters to buyers took place, our vacancies were down year over year.

And you're right, there is a swapping of homeownership going on that balances out the situation. Most homeowners losing their houses don't end up living in their cars - Thank goodness!
0 votes Thank Flag Link Thu May 6, 2010
Well here in California many of the would be renters that may be out of a job or loosing their home are saying "screw it" and moving out of the state. The government is in bed with the banks and is forestalling the natural flow of foreclosed homes to the market by subsidizing the banks with low interest rates so they can take advantage of the over borrowing of the American consumer by charging outrages fees and interest rates on credit cards. So the banks are flush with cash and have no motivation to take a hit on their non performing assets.

This is what I see here in Southern California.
0 votes Thank Flag Link Thu May 6, 2010
Banks appear to be warehousing many foreclosed homes so the supply of housing remains tight. This is a paradox in what is largely a buyer's market. There is not a large increase in rental housing due to continuing limited sales/listings. Renters are not willing/able to buy the cheap housing due to tight credit and high unemployment and underemployment. There continues to be a large number of sellers though that are willing and able to rent their homes until the market recovers. This seems to be mitigating the tight supply of housing in the mountain area of the high desert. It is not clear that rents will change significantly due to these opposing factors.
0 votes Thank Flag Link Thu May 6, 2010
There are--and always will be--(dis)advantages to owning and renting. Rent payments typically are cheaper than mortgage payments on both coasts; whereas, it's vice versa in many markets in "fly-over land" (ie Midwest, TX, etc). Regardless of the foreclosure situation, rent in certain parts of the DC metro, Greater Cleveland, Dallas, and ATL has continued to escalate; it is stagnant in other areas; and it has decreased in other areas.

I recall attending a DC area REI meeting during summer 2008 where some landlords complained about excessive vacancies and declining rents; yet, others celebrated at the same meeting about increased occupancies and escalating rents. What gives? How can both be true in the same market? Well, upon a closer inspection, one saw that occupancies and rents increased the closer the properties were located to downtown DC. AND properties located closer to DC Metro (public transportation) stations, or in close proximity to the major transportation arteries sold/rented for higher values.

Stated another way, one saw people, who couldn't afford to live as close to downtown DC, move closer. That cycle repeated itself a few times over the past couple years--both for rentals and non-rentals. Plus, larger apts have economies of scale such that the owners sometimes can afford to rent a few units for less, and still turn a profit. Doing this effectively undercuts the smaller investors who might only own a rental home or 2, because 1 vacancy often translates into 0% occupancy for them.

I saw similar things happen in parts of Cleveland, Chicago, and ATL--but not in exactly the same way.

One point that hasn't been raised is that all of this activity--for better or worse--has helped to gentrify various neighborhoods. Maybe that's a good thing for some, and maybe that's bad news for others.

Another thing that hasn't been addressed is that areas that have continued to experience population growth--like the DC metro (due to the "federal bubble" [which translates into more jobs and 'perceived' job security])--continue to see rising property values and rents in certain areas. DC isn't alone; I've read about similar things in NC, TX, parts of AL, etc.

So in a nutshell I view the expiring of the housing tax-credit as flushing after relieving myself: it's gone--and what a relief! At least have of the buyers were REPEAT buyers, and the tax-credit didn't do much--if anything--for them (myself included) for the most part. Yet, I do wonder what will happen once the swirling waters from our financial-flush will reach our financial water-treatment plant.
0 votes Thank Flag Link Thu May 6, 2010
I would like to thank everyone for their contributions. I plan to track this over time to see if vacancy rates increase or decrease and if the average price of rents go up and down. I promise to blog about it from time to time. Please continue to share your opinions and let me know what is going on in your local markets.
0 votes Thank Flag Link Thu May 6, 2010
Hello Ken,

The housing tax credit was a great incentive for first time home owners. My personal opinion is consumers are savvy and can see the benefit to owning a home over renting. I don't see the expiring housing tax credit affecting the market. Like any other industry it was a great tool to attract first time home owners. I'm optimistic and believe the market will continue to thrive.

Kenny Burrell
Web Reference:
0 votes Thank Flag Link Thu May 6, 2010
The individuals who were making those purchases, the 40% to 50% you speak of will be the same 40% to 50% next year and the year after that. As always, when a buyer is ready to buy a home, they do it. The tax credit was just a warm fuzzy to make people feel assured about moving forward on the dreams they had already had ideas of anyway. Tax credits have always been available to buyers who purchased with a mortgage. I don't see interest rate deductions going away any time soon. Your displaced, foreclosed renters will still need a place to live.
0 votes Thank Flag Link Wed May 5, 2010
Out of the 38 homes I have sold this year so far, I really only saw about 2-3 who were trying to take advantage of the tax credit, so overall I dont think its going to have any noticable impact on rentals. Credit requirements are going up and so are the interest rates, therefore there will still be a very solid need for rental properties across the country. Foreclosures are a concern, yet the banks are selling most of those to investors, not first time home buyers as they are requiring money down and not assisting with full closing costs, which is kicking the lower priced home buyers out.
0 votes Thank Flag Link Wed May 5, 2010
I'm personally glad it's gone!
The "credit" was never available for buyers when they needed it. It was so confusing that many potential buyers kept putting off a home purchase. Now we can get back down to REAL negotiations. People who didn't qualify for the credit and were mad about it, refused to purchase a home because of their anger and feelings of being cheated. Now they are ready to buy, because they can compete on an even basis with all other home buyers. Sellers will need to be more flexible in accepting offers, because they no longer have the government supplementing their sales price.
0 votes Thank Flag Link Wed May 5, 2010
One one hand, developers were frozen or shut our from getting this credit. So, I don't expect any influence from that end. On the other, the tax credit did a wonderful job urging, poking, and pushing renters into the home buying market......

On a THIRD hand!!!!! Many, many many, renters out there right now are folks that BECAME renters during the foreclosure crisis. Pushed rental values up.

So - We should see, more renters and a static amount of rentals. Prices should rise? Maybe. The question that needs answering is this. How many renters were introduced to the market during the foreclosure crisis and how many renters were removed from the market by becoming homeowners? What is the difference? I have not seen these numbers. Has anyone else seen anything definitive?oln, NC May 21, 2010

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0 votes Thank Flag Link Wed May 5, 2010
Since the mortgage lenders have very tough guidelines as in the past, it is difficult for a consumer with an average credit score to obtain a loan. They are now forced to stay in their rental unit.
0 votes Thank Flag Link Wed May 5, 2010
Interesting question. One one hand, developers were frozen or shut our from getting this credit. So, I don't expect any influence from that end. On the other, the tax credit did a wonderful job urging, poking, and pushing renters into the home buying market......

On a THIRD hand!!!!! Many, many many, renters out there right now are folks that BECAME renters during the foreclosure crisis. Pushed rental values up.

So - We should see, more renters and a static amount of rentals. Prices should rise? Maybe. The question that needs answering is this. How many renters were introduced to the market during the foreclosure crisis and how many renters were removed from the market by becoming homeowners? What is the difference? I have not seen these numbers. Has anyone else seen anything definitive?
0 votes Thank Flag Link Tue May 4, 2010
Hi Ken,

I'm in agreement with the other answers here as well - and as Chris said, every market is unique.

Here are just a couple of my thoughts (speaking as a prior economics and finance major in college, big whoop, huh?!):

I don't believe rentals will (or have been) adversely affected because those buildings are either already owned by investors or are now owned by someone who purchased a multi-family and who is occupying at least one of the units. Even if the new owners of a MF were renters to begin with, they've left the rental market but created another replacement opportunity for that rental spot to be filled. They also have the potential to make even more rentals available, if they decide to rent out the extra unit instead of selling or condo-izing it (assuming it wasn't previously rented out).

As the population ages, there will also be many new participants coming into the rental market, perhaps just as fast as others leave the market. For example, here in the Boston area, we have a large turnover every year in rentals as college students move in, move out, then graduate and move somewhere else within the city. So there's always big demand for rentals here - that's the "unique market" aspect I mentioned above.

As for changes coming because of the expiration - I don't believe we'll see lots of change either. People who were ready and willing to buy have already bought. Anyone who's been looking over the past month or so pretty much wasn't motivated by the tax credit - their thought process is that they'd rather find the right home they love rather than live in a home they end up hating because they bought just to beat a deadline.

As for foreclosures - I believe those will have a continued affect on the market. Many of the people currently in a home with an underwater mortgage may soon find it's cheaper to rent and leave their home than it is to continue paying the mortgage amount (called strategic default). So, the demand for rentals will increase. And those foreclosed properties - they'll become starter homes for people who are renting now but waiting to buy when a good deal comes along (think fixer-upper project and sweat equity).

Those are just a few of my thoughts. Anyone else have ideas to share?

0 votes Thank Flag Link Mon May 3, 2010
Ken...every market is undoubtedly know that in SF the market for rentals has stayed in Phoenix, we have seen so much activity across the board regardless of a buyer's ability to take advantage of the tax credit...I think that the old addage is going to remain location gets higher dollar for purchase or rental. The burbs are the only real rental "bargains" here at the moment.
0 votes Thank Flag Link Sat May 1, 2010
Since there will not be as many first time buyers buying, they will be staying in there rentals longer thus creating a more stable rental market.

Foreclosures will be around for awhile so there will still be some who buy.

Good luck
0 votes Thank Flag Link Sat May 1, 2010
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