Lots of rentals may mean bargains

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Dear Real Estate Adviser,
I am considering purchasing a home in Tucson, Ariz., in a large community approximately 15 years old. However, while driving through the area, I noticed many “for rent” signs. How does this affect a home’s worth and future resale value?
— William M.

Dear William M.,
In today’s enigmatic market, it’s hard to say just how an abundance of rental homes in a given area will affect values a few years down the road. Why? Well, five years ago I would have said such a scenario was likely a symptom of a neighborhood headed south, homeowners fleeing and values edging down. But these days, with so many homeowners upside-down on their mortgages in neighborhoods ranging from the lower-end to upper-middle class, the old rules don’t seem to apply.

Also, consider that the Phoenix and Tucson areas of Arizona have been particularly hard hit. A new report from Arizona State University shows that foreclosures represented 31 percent of existing-home transactions in June, which sounds bad until you look at the 43 percent such transactions represented in February. Of course, we’ve seen such up-and-down data fluctuations before in this “recovery.”

As for the community you’re considering, this renting trend you observe can be good in the sense that it’s probably the only way for financially challenged homeowners to prevent further foreclosures and distressed sales, which will drag down values far faster than rental units. The rental units, on the other hand, can be bad if they become a permanent fixture and attract unsavory, transient types who upset the balance and stability of the neighborhood. However, the relatively young age of the homes in the area tells me this neighborhood has a better-than-average chance of surviving this cycle with grace.

To get the full picture, we should also consider recent changes in the ratio of homeowners to renters. More than 4 million homes have been lost to foreclosure in the past half decade, turning many previously owner-occupied homes into rentals. In fact, since the peak of the housing market in 2006, renter households have grown by an average of nearly 700,000 per year. People who have lost their homes have to live somewhere.

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