Can a new plan to rent out foreclosed properties help the housing market?
Of all the problems plaguing the U.S. housing market right now, two stand out. First, there’s a glut of foreclosed properties out there putting downward pressure on home prices — and that weak housing market, as we’ve seen, is putting a damper on economic growth. At the same time, there’s an undersupply of rental units, which is causing rents to increase faster than inflation in places like San Jose, Washington, D.C., Seattle, New York, Houston, and elsewhere.
Is there a way to address both of those problems at once? Possibly. Consider that Fannie Mae, Freddie Mac, and the Federal Housing Administration now own some 250,000 foreclosed homes — roughly half of the total number of unsold, repossessed properties out there. There are also another 800,000 or so homes in some stage of foreclosure that are backed by the agencies. So what if the government took these properties off the residential housing market and instead sold them off in bulk to private investors, who would be required to convert them into rental units?
On Wednesday, the Obama administration announced plans to do just that. The ultimate goal would be to stabilize the housing market and bring down rents at the same time. And conveniently, the move wouldn’t require a vote in Congress.
But one big question, as Kevin Drum notes, is whether private investors would even bother. After all, investors already have the opportunity to buy foreclosed properties from the government and interest has been relatively limited. (If Fannie and Freddie sold off their properties at fire-sale prices, their losses, and hence their costs to taxpayers, which have already passed $150 billion, would keep mounting.) “So,” Drum asks, “what changes under this new proposal?”
One response is that investors haven’t really had this opportunity — at least not yet. Investor demand for distressed properties has picked up in the past year or two, says Oliver Chang, head of housing strategy in Morgan Stanley’s Research Division. “But the ability to buy them up has been constrained. There haven’t been a lot of bulk sales programs so far, for a variety of reasons — they’re complicated to structure and coordinate, for one.” Chang also notes that many investors interested in buying up distressed properties have had trouble getting access to debt financing — which is necessary if the goal is buy up properties, hold them for a period of time, and rent them out.
Can the government figure out how to make this work? On Wednesday, the Federal Housing Finance Agency announced a “request for information,” soliciting feedback from the private sector. The Wall Street Journal previewed some of the ideas under consideration, from simply selling properties in bulk to allowing investors to “enter joint ventures with Fannie or Freddie to invest in a pool of converted rental homes.” Meanwhile, on Monday, Morgan Stanley came out with its own proposal to encourage investors to participate, which involved some additional components, such as a government lending programs for investors and tax breaks on rental income.
Any of these plans could have downsides. Investors might not offer high enough prices to make it worthwhile for Fannie and Freddie. What’s more, investors buying properties in bulk haven’t always made for the best landlords. Jared Bernstein of the Center on Budget and Policy Priorities, who has argued that this rental proposal is worth trying, notes that the FHFA’s announcement today seemed to be aware of this latter problem: “The government can reject proposals that don’t show a commitment to property management,” Bernstein told me. “That said, commitment by itself probably isn’t enough, and they’ll need to do some oversight.”
It’s worth noting that variations of this idea have been floating around for a while. Dean Baker of the Center for Economic and Policy Research has long proposed a simpler method: As part of the foreclosure process, Fannie and Freddie could simply offer the homeowner the opportunity to stay in his or her home by paying market rent. When asked about this idea in a conference call with reporters today, administration officials noted that, while they weren’t ruling out alternatives, they were more focused for now on seeing if they could drum up interest among private investors.
Another theme of the conference call was that this doesn’t appear to be the last word on housing policy. It mostly seems to be a sign that the administration is no longer content letting the housing market sort itself out and is trying to get a little more creative with policy options.