Morgan Stanley: U.S. Becoming ‘Rentership’ Society

By Robert Freedman, Senior Editor, REALTOR® Magazine

Well, there’s at least one big Wall Street banker that’s betting on the United States becoming a “rentership” society: Morgan Stanley.

The company released a report just a few weeks ago saying now is a great time for institutional investors to snap up distressed single-family homes and turn them into long-term rental units. The company says the properties don’t compete with the classic apartment rental property, so investors don’t have to worry about cannibalizing their multifamily rental investment portfolios to take advantage of the huge opportunities in single-family rental property ownership. What’s more, Morgan Stanley doesn’t see this shift to rentership as a temporary waypoint while the country sorts out its housing problems; it sees this as a fundamental shift in how the United States will define itself into the future.

“America is moving away from a home ownership society and towards a rentership society,” the company says in its report.

To emphasize the point, one of the report’s authors, Oliver Chang of Morgan Stanley’s Housing and Securitized Products Strategy division, said in a video interview (above, after a 30-second commercial), “This is really the first time in history where there’s an opportunity for institutions to own single-family rental properties as part of a larger asset allocation strategy.”

The reason for the shift to rentals, according to the company?

  • Home price declines: not only are millions of homes available to investors at deeply discounted pricing but the low prices are changing consumer attitudes on housing as an investment
  • Hurdles to buying: down payment requirements, higher FICO score thresholds, and income verification are making it harder for households to even consider buying
  • Costs of ownership: without home price inflation, costs like property taxes, home owner association dues, maintenance and repair make ownership less attractive
  • Demographic effects: Gen Y growth is heading up while baby boomer households are downsizing
  • Unemployment, labor insecurity and mobility: long unemployment durations make labor mobility (and thus renting) more important

Morgan Stanley says the U.S. home ownership rate, which has fallen to about 64 percent from close to 68 percent at its peak, is really closer to 60 percent when you factor in home owners who’ve stopped paying on their mortgage and only remain in their house because the bank hasn’t finished processing their foreclosure yet.  Once these cases make it through the system, they’ll move to the renter side of the equation.

When they do move to the other side of the equation, they’ll become renters of single-family houses, not of multifamily apartment units. That’s because these households, which tend to be a little older and often with children, want a single-family house in the suburbs, not a unit in an apartment building in the city. So, these households will be providing a big share of the demand for single-family rental houses into the future without necessarily adding demand to apartment rentals in the city.

To be sure, many of these households might like to buy again rather than rent given the historically low interest rates and deeply discounted home prices, but the reality is that many of these households simply can’t pass the credit score threshold. Financing is hard to get for the most creditworthy households today, so for credit-impaired households, renting is the only option.

Morgan Stanley projects some 7.5 million more foreclosures over the next five years, what it calls “liquidated” houses, providing a golden opportunity for institutional investors to snap up properties for their portfolio and get into the long-term single-family rental business.

If the company is right, then this is a great opportunity if you work with institutional buyers of real estate, whether on the buying, selling, or property management side. You have tons of inventory coming onto the market to sell to big buyers who will turn these into long-term rentals.

But you might also challenge the company’s basic premise. Is the American Dream really transitioning into a “New Pragmatism,” as the company calls it, under which rental housing is the way of the future?

The fact is, if lenders simply dialed back their underwriting requirements to the sound policies they used before the housing boom, home sales would pick up, inventories would shrink, prices would start heading up in more than a few markets, and that 7.5 million in foreclosed houses Morgan Stanley predicts over the next five years will be a smaller number. And those that want to rent can rent and those that want to buy can buy rather than having to rethink their priorities in a new rentership society.

In any case, a survey that just came out today from Meredith Corp., one of the biggest magazine publishers in the country, finds that home ownership remains all-important to most households. Some of its findings:

  • 86 % of homeowners polled still feel owning a home was a good investment.
  • 85 % say they feel, “owning a home is one of their proudest accomplishments.”
  • Of Americans that don’t currently own a home, 69 % agree, “No matter what happens in the U.S. housing market, owning a home is still an important goal in my life.”

Go to that Meredith home ownership survey now.

The Morgan Stanley report is called “Housing 2.0: The New Rental Paradigm,” and it’s dated Oct. 27, 2011. If you can’t find the report or a summary, you can hear Oliver Chang talking about it in the video above although you have to watch a 30-second commercial before the video comes on.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

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  1. This is terrible for the American citizen. The American dream is being cannibalized by the major banks and lending Institutions plus by Wall Street with their blessings.
    Institutionalized rental’s, just think…you money what ever little you may end up with as the corporations siphoning all you have. Demographics of your spending will tell them down to the last penny what they can expect to collect from you for rent.
    This is a sad day in American History!!!!

  2. Nonsense. Every downturn comes with exclamations of “Renting is the new owning!”

    When the job market recovers and the economy is rolling again, housing will be stride-for-stride in the appreciation. This may take a long time based on the current crisis, but it will come.

    The minute home prices begin to rise again, these kinds of stories will disappear. 85% of Americans publicly state that they want to own a home, while the other 15% just haven’t gotten to that point yet. Prices will be low, interest rates will remain low for some time, and appreciation/equity will be easily attainable. “Rentership society” prognosticators will miss the upswing.

    Sam DeBord
    Managing Broker
    Coldwell Banker Danforth of Greater Seattle

  3. Foenix

    As a Realtor, i see many more buyers looking for cheap, distressed properties that they can buy with the cash they have. More people are finally starting to see that big debt is big mistake and are shying away from a nicer home in order to live debt-free. If we, as a people, had realized this a few decades ago and lived like our grandparents had to- spending less than we earn and saving up for major purchases, our economy would not be where it is now.
    As far as rentership goes, yeah, a lot of qualified buyers seem to be too afraid to buy right now and would rather rent. A few I have asked about this decision say they do not trust the economy and they would rather wait and see what happens over the next few years. they prefer someone else to be responsible for maintenance, as well.
    I think, as long as the media keeps going on about how bad all the banks are, many people will be afraid to buy a home. Area investors are snapping up the cheaper, distressed properties to use as rentals- SOMEONE has to fill the need.

  4. *Hurdles to buying: down payment requirements, higher FICO score thresholds, and income verification are making it harder for households to even consider buying.

    Are you joking?! That’s the way it should be. Regardless of the outcome people should have to qualify for homes. Responsible lending is the largest responsibility of the years to come.

  5. Gary Cohen

    Renters will rent until it is cost effective to buy. In my opinion if you can buy this is the time to buy. Anyone with a FICO of 620+ and and a stable job with only 3.5% down payment can buy. The rheoteric that there is no financing is ridiculous for most potetial buyers. Buying is and will return as the best option for families to build stability and wealth. For now there is an opportunity to buy distressed homes and rent them but that time will pass and people will buy homes and prices will move up accordingly.

  6. Dee

    @Sam DeBord: This won’t end when rices rise if the same number of people are unemployed and wages stagnate – which they are. If people cannot afford houses now when they are (relatively) cheap, how could they afford houses if they more expensive.

  7. It’s a shame that people are forced to rent because they can’t get approved for a mortgage when their monthly rent will probably be just as much, if not higher, than what they would pay on their mortgage. Seems fair though — if these are the same people that are being foreclosed on because they didn’t have the means to pay their first mortgage, why should they get approved again? If you can afford it, buy an investment property and rent it out…

  8. I have to agree with Sam on this one. Now is the perfect time to buy low, wait about 5-10 years, and sell high. It’s the classic “real estate roller coaster” that we all live by.

  9. It’s the classic market paradigm: buy low, sell high. If one can make income in the meantime, even better. But it takes guts to go against the grain.

    People want validation of the herd. Real estate isn’t sexy right now, many have gotten burned buying high, so they are scared. This is keeping many potential players on the sidelines, to their detriment.

    2-4 family homes can be real money makers. I’m advising my clients (and anyone else who will listen/can afford them) that now is the time to be buying quality income properties.

    Marc Jacobi
    Prudential CT Realty
    Westport, CT

  10. Daniel Boor

    Olivia you are totally wrong!! If you want a vilian, look to the Government actions in housing to see who is really destroying home ownership!!
    I believe President Reagan’s success was primarily because he was able to change the American psyche of a built–in 7%(according to the eggheads) inflation rate (stagflation)to a no built-in inflation rate and a rebirth of America’s “can do spirit”.

    It appears to me the new Presidential hopeful must perform a resurrection of the American “can do spirit” by instilling self reliance instead of Government reliance.
    My Real Estate experience of 41 years says the continual Government intervention in the housing industry has physiologically created a change in the individual’s sense of responsibility toward written agreements he/she signs. This was done by the Government’s Real Estate programs which continually and unilaterally changed these agreements that has caused individual’s to believe it is “OK” to ignore their written agreements, i.e. if it is “OK” for the Government to disregard what was agreed to, it must be “OK” for them to do the same. This attitude must be changed!!

    The Government also took the “skin out of the game” when it eliminated the “mortgage boot”. This happened when an individual who had a reduction in mortgage debt because he/she walked from their home and their lender realized a loss, upon foreclosure or short sale, on the resale of the home. The regulation eliminating the realized “mortgage boot” must be changed to put “skin back in the game” and help stabilize home values!!

    This is the only way Real Estate values will stabilize; otherwise we will continue to see the downward spiral in home values because of REO’s and short sales.

    Without change the U.S. Economy will probably still be in recession/very low growth, since the Real Estate Industry has led our economy out of recession since 1961.

  11. Blame the greedy bastards that sank the lending market by loaning too much to too many non-qualified buyers, and the unrealistic buyers that had to have the biggest house they could not afford. Let’s call it lack of responsibility and lack of accountability, as well as the greed of the American Banking Industry. Now they are penalizing appraisers and in turn sellers and Realtors as a backlash for over-pricing in an up market to cover closing fees, down-payments, etc so buyers could buy with nothing out of their own pockets, hence no penality to simply quit paying the mortgage or walk away. There used to be a reason for people to invest in their own future, called pride of ownership not just leverging everything they wish to possess(notice the word “own” ommitted). Hopefully this will correct in the future. Randy Haslett Real Estate agent

  12. Obviously, since Morgan Stanley is proposing that investors buy up distressed properties and turn them into long-term rentals, they are not taking into consideration that since renters have no vested interest in the property, they are less likely to maintain the integrity of the neighborhoods in which they live. Thus, the neighboring properties occupied by owners are at risk of losing value because of blighted property within their development. Even in developments with HOA’s and restrictive covenants, it is very difficult to get an “investor/owner” to make sure their tenants are informed of and comply with the covenants. In some, upscale developments, for this very reason, leasing is not allowed.

    A Mississippi Real Estate Broker.

  13. MOGY

    Well, it is what it is…. I agree that for the next five years home ownership for the majority for folks will not be attainable. This is the PERFECT time to buy, if you have the money, job, and great credit score. If you have the money, this is the time for some long term investing in real estate. The key phrase here is LONG TERM, hold the property for the time when prices increase. Prices will increase on a market by market basis so DO YOUR HOMEWORK! Another great idea is to buy ther real estate now, while prices are low, and think about using them to BUILD FUTURE WEALTH. This may be one way for some folks to build wealth for thier families going forward.

  14. Morgan Stanley is simply trying to hedge it’s bets; note the emphasis on “institutional investors.” Despite the decline in Real Estate values the properties do not “vaporize” overnight the way much of the stock and bond market can.

    While trending down – the values are more or less stable and reliabl, in an economy where large investors have little or no security and are at risk of losing many of their tax shelters.

    What Morgan Stanley pitches as a “trend among homeowner/renters” is really jst a pitch for a new product aimed at securing the wealth currently at risk.

    Renting a single family home is not a savings to the resident. They are still absorbing the finance, interest, and tax costs in each month’s rent. While they may not get stuck with a sudden repair bill or have to fork over a huge down payment, they are also forfeiting the single largest tax shelter available to the middle class.

  15. Sam McGee

    I don’t see any evidence that Morgan Stanley is placing a bet per the opening line? What proprietary investments is it making? It seems one of its researchers is merely talking about what he sees in the market. The opening line of this article is misleading — I don’t think Morgan Stanley is putting any money at risk.

  16. Ricky B

    Investors like the Blackstone company is buying up houses and then selling securities on the rent from them. This new trend is yet another bubble waiting to burst and it’s also making Blackstone into a terrible, negligent landlord. Aside from that, as others have said, as inflation increases, wages stagnate and employment remains low or in low paying jobs, it will become harder and harder to own a house. Meanwhile, those few on the upper end of the income scale continue to make more and more at the same time that each worker becomes more productive. I consider this current state of our economy and it’s laws and business practices to be downright criminal and needs to be turned around. The government panders to the wealthy, leaving the vast majority of us nearly unrepresented, and clearly the wishes of the majority have no power in congress unless we actually start voting them out of there. No taxation without representation.