Foreclosures' Silver Lining: They Could Restrain Rent Inflation via Dallas Fed

The U.S. housing market served both as a trigger and a catalyst during the recent financial crisis. Roughly $7 trillion in household wealth was lost as average house prices declined by nearly one-third from their peak (Chart 1). The resulting negative wealth effect—decreased income and deleveraging of consumer balance sheets—suppressed consumption and deepened the recession.

Recent economic indicators suggest that the worst of the housing crisis has passed, with home sales and prices reaching bottom in 2012. Construction, housing prices and homeowner’s equity show early signs of resumed growth.

While these signs are encouraging, a notable disconnect has emerged. Rental inflation has surpassed historic levels despite a supply of housing that partly reflects a persistent inventory of foreclosed, vacant homes. Several impediments have hindered a market-based resolution to the crisis’ lingering effects. Among them, individuals have found mortgages hard to come by due to tougher credit standards, and investors interested in bulk purchases have encountered owners unwilling to enter into these types of sales.

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