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TheStreet Open House

Americans Will Still Rent Despite Housing Recovery: BofA Merrill Lynch

Stock quotes in this article: XHB, IYR, AVB, EQR

NEW YORK ( TheStreet) -- It is now cheaper to buy than to rent in almost every major metro, but the demand for rental properties is not going away.

The housing bust caused a rise in renters at the expense of home ownership. Borrowers who lost their homes to foreclosure turned to renting. Tight mortgage credit also forced many would-be buyers to rent.

And household formation itself slipped as many young adults chose to move in with their parents in the downturn.

Some of those factors are now receding, causing some to argue that home ownership rates would trend higher once again. Foreclosures, for instance, are declining and borrowers who were hit by foreclosures early in the crisis might now be qualify for a mortgage again. Secondly, with the economy improving, household formation is beginning to take off again.

But according to Bank of America Merrill Lynch analyst Michelle Meyer, the shift toward renting from home ownership in the past few years, while largely a consequence of the housing bust, has lasting implications.

While many newly created households will be buyers, "a good portion will also be renters, given the challenges facing the youth population in terms of student debt and access to credit," says Meyer.

Meyer estimates that household formation undershot by 2.5 million units during the housing bust years. That is now "pent up household formation that would be realized over the next few years in addition to the natural underlying trend."

So although foreclosures are on the decline, shrinking that pool of renters, there is still likely to be strong demand for rental homes as not all of the newly formed households in the coming years would be able to secure a mortgage.

The analyst expects further upside for apartment construction and rental inflation. Increasing demand for rent will also be met with supply of single-family rental homes. Currently, 30% of renters live in single-family homes according to the analyst.

Institutional investors such as Blackstone (BX) are investing billions in converting foreclosed homes into rentals.

There could be some fluctuations in the supply dynamics in single-family rentals. A shrinking pipeline of distressed homes, high operational costs in the single-family rental business and potential exit by some big investors as yields shrink may limit the single-family rental supply in the market.

But the analyst believes that demand from rising household formation is likely to drive rents and supply higher.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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