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TransUnion study finds a post-recession shift in tenants’ credit behavior

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What a difference a few years make!

There’s no denying that the economy has drastically improved since the depths of the Great Recession. Between 2008 and 2009, housing prices plummeted, people filed for bankruptcy, and many tenants and homeowners found their credit scores wrecked.

Today, housing prices are on the upswing, and new multifamily apartment projects are popping up block after block. These newly constructed housing units aren’t cheap, but that doesn’t seem to be of much concern to renters. A new study finds that despite the steep increase in rental prices, renters today are less financially constrained than they were just after the recession. The study confirmed that on average, renters at the mid-point of 2016 were lower risk and more credit-active than renters were in 2010.

How Has Credit Behavior Changed Since 2009?

The study, conducted by TransUnion, analyzed the credit behavior of 775,000 renters who moved in Q2 2009, and 631,000 renters who moved in Q2 2015 in the 12-month period following their move.

TransUnion found that 38.6% of the 2015 renters had a prime or better credit score (660 or above) in 2015, compared to just 26.2% of the 2009 renter group. Almost half (48.8%) of the 2009 renter cohort had a credit score between 300 and 600, while just under one-third (32.4%) of the 2015 renter group had credit scores at this level.

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TransUnion’s senior vice president of research and consulting, Ezra Becker, explains:

“Comparing renters from the immediate post-recession period to renters of today highlighted an interesting dynamic. While renters in 2009 were facing a difficult economic environment, renters today also face challenges because of rising rental prices. Yet significant economic changes have occurred between 2009 and 2016, with a net overall benefit to renters. Today’s renters are generally lower risk and more credit active in the 12 months following their move, taking on more auto loans and credit cards than previous renter cohorts.”

Yet surprisingly, despite being more credit active, it seems like fewer renters are maxing out that credit today. TransUnion used an aggregate excess payment (AEP) algorithm to look at how much “excess income” each renter group had after paying all of their monthly debt obligations and found that the percentage of renters with an AEP greater than $100 had increased from 53% in 2009 to 59% in 2015.

So yes, rental prices have increased since the Great Recession. In some cities, rental prices have even skyrocketed. But it seems that wages are at least keeping pace well enough (or renters are foregoing other expenses) for renters to still have money left over at the end of every month.

Credit Behavior: The Good News for Property Managers

The findings from the TransUnion study come as welcome news for landlords and property managers. Studies show that credit score is the single most reliable indicator of tenant success that exists, bar none. Credit scores help to weed out people with high debt or outstanding credit obligations.

“Following the Recession, younger consumers may have been underemployed or have chosen to live at home with their parents. Older consumers may have opted to stay in a rental unit instead of purchasing a home,” explains Mike Doherty, senior vice president of TransUnion’s rental screening solutions group. Indeed, this may explain why renters’ creditworthiness has improved, and why credit utilization is lower among today’s renters than in years past. “The good news for property managers is that renters of all ages are managing their credit obligations well.”

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Of course, though credit behavior may have a big influence on a landlord or property manager’s evaluation of prospective tenants, credit scores are only one of the factors that should be taken into consideration. For instance, the tenant I took on at my first rental property had a terribly low credit score (in the low 500s)—but she explained the financial turmoil that she wound up in following a divorce and several medical setbacks. I called her landlord references and confirmed her current income, and I’m happy to report that 4 years later, that tenant has paid rent on time every single month. In fact, she usually pays her rent a day early.

Landlords and property management companies should certainly consider credit scores as part of the tenant verification process. However, they’re advised to consider several factors—such as credit history and rental payments—to gain more insights into the prospective renter’s financial wherewithal before letting them sign a lease on the dotted line.

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Amanda Maher

Amanda Maher

Amanda Maher is a self-proclaimed policy wonk who dabbles in real estate law. Amanda holds a B.S. in Political Science and Sociology from Boston University, as well as a Masters in Urban and Regional Policy from Northeastern.