Moving, But Can't Sell Your House? Rent It Out

The Wall Street Journal today has a nice piece about a new phenomenon in the U.S. Homeowners are increasingly deciding to become landlords when they need to move but cannot sell their house, given the poor real estate market. The Journal refers to these individuals as sort of "reluctant landlords," since they would far prefer to have just sold their house and been done with it, but the current economic situation doesn't allow it. It even provides "ten tips on renting your house out," for any readers interested in doing so. I think we'll continue to see this phenomenon grow in the short term. That's good, because it's better than the alternative.

The WSJ notes:

Hard data are scant on how many homeowners are renting out their homes, but anecdotal evidence suggests numbers are up. In one indication of the trend: More homeowners are converting their homeowners insurance to landlord policies that cover the additional risks of leasing out a home. Allstate Corp., the second largest home insurer in the U.S., reported a 27% increase in conversions in the first quarter from the previous year.

First, it should be noted that the combination of the truly rotten real estate market with high unemployment is a very bad one. If people can't sell their houses, labor mobility will be weakened. If you find yourself unemployed in a state going through severe economic turmoil, you might find it hard to leave if you can't sell your house. For example, someone laid off in Michigan (15% unemployment in July) might wish to move to Minnesota (8.1% unemployment in July) in hopes of better job prospects. But the difficulty in selling his home might prevent him from doing so.

In most recessions, the housing market might not be at its greatest, but it's probably better than we're seeing this time around, so labor mobility isn't quite as problematic. As a result, I would expect this subtlety to result in unemployment lasting even longer than it normally would in a recession, since labor mobility is lower than usual. The phenomenon of reluctant landlords, however, will help to improve labor mobility.

Another bit of weak consolation is that many Americans are also going through foreclosure and probably looking for a home to rent. That provides a sort of perfect opportunity for homeowners seeking employment elsewhere to rent out their homes to individuals who have no option other than renting. As foreclosures continue to rise, there probably won't be a shortage of potential renters.

One word to the wise: any potential renters should be wary of homeowners looking to rent out their houses. I've heard stories of underwater homeowners in Florida who are renting out their homes while going through foreclosure. Once the foreclosure process is finished, and the bank officially owns the home, renters will be forced out.

Even those homeowners who are legitimately renting out their homes as the WSJ article describes probably don't intend to do so forever. As a result, it probably isn't the ideal rental situation for someone who hopes for a long-term stay. Once the housing market picks back up, I would expect all of these reluctant landlords to sell their homes as quickly as possible, and tell their tenants to go elsewhere.