Quick—Rent Those Distressed/Foreclosed Homes!

June 21st, 2011 at 6:20 pm

Point #1: The housing market is still glutted with excess inventory and thus remains a fat, hairy albatross around the economy’s neck (i.e., if birds can be hairy).

#2: The government, through the GSEs (Fannie and Freddie) and the Federal Housing Administration (FHA) hold a lot of mortgages.

#3: As shown in a research note today from Goldman Sachs (from the nice economists, not the nasty traders), these federally held or backed mortgages now comprise the majority of bad loans—the ones either in or heading for the foreclosure process (see figure).  The first quarter of this year “marked the first quarter since 2009 that the GSEs and FHA were a combined net supplier of foreclosed properties to the market.”

#4: So, given #1, once these properties foreclose (or even when they’re headed in that direction), can’t the gov’t do something better than dump these on the housing market!?!

Yes, and here’s what it is: RENT THEM.

The rental market is far from glutted (rents are rising even while home prices are falling).  Sure, there are weeds here—FHA and the GSEs may view this type of restructuring as not being a good conservator of the taxpayers’ investment, implying that they could recover the losses on the debt by reselling the property.  But as the GS folks say, “this [rental idea] could make sense from a financial perspective, given that recovery rates on distressed properties are low, rents are rising, and the rest of the GSE book of business would benefit from stabilization in home prices.”

I’m tellin’ you—I’ve got a good feeling about this idea.  We should try it…quickly!

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11 comments in reply to "Quick—Rent Those Distressed/Foreclosed Homes!"

  1. Matt says:

    Hi there,

    Interesting idea, unfortunately it seems like home stripping may be a major practical problem. I wasn’t able to find anything more than anecdotal news articles, as, interestingly, it does not seem any studies have been published on this behaviour. However, having recently helped purchase a home in a severely distressed market, I would suspect that a double digit percentage of homes that end up being foreclosed are not fit for rental without investing in repairs and upgrades.

    Perhaps a more indirect approach related to incenting banks holding the remaining mortgages and/or helping to finance landlords refurbishing of formerly distressed properties would achieve the same effect more efficiently?

    I suppose an obvious question is how much authority the FHA/GSEs have in this area, or whether this would require legislation.

    (Also typo on #4, “dumb” should likely be “dump”)


  2. tom says:

    This is halfway to the ‘own-to-rent’ proposal that Dean Baker has been pushing for four years, and that Rep. Grijalva has introduced legislation for in the last three Congresses. Google says Obama administration was considering it in 2009.


  3. Tucker says:

    I think the mis-investment in real estate was also geographical. My partner and I bought a duplex to live in one unit and rent the other a year ago so we’re looking for our second tenants and because we didn’t raise the rent we are getting a lot more interest than we did last year. It looks like multi-familiy homes here actually went up by about 5% last year here while single family homes the outer suburbs are still falling pretty quickly. As commercial real estate prices fall companies are also closing their offices in the outer suburbs which further depresses those areas relative to the urban areas and inner suburbs.


  4. Michael says:

    Hehe, silly economist. The purpose of banks isn’t to help the economy. The purpose of the economy is to feed the vampire squid.


  5. Kevin Rica says:

    ” Goldman Sachs (from the nice economists, not the nasty traders)”

    It’s Goldman F**ing Sachs!!! The only reason that they haven’t sold their souls to the Devil is because they never had any. Who cares if they also give campaign donations to Charlie Schumer?


  6. PeonInChief says:

    Unfortunately the rental market doesn’t operate on supply and demand. Rents don’t fall until the vacancy rate is more than 10%, and then not by much.


  7. comma1 says:

    And how do you expect for people to pay for these apartments now that Obama and Repubos have destroyed the middle class and refuse to do anything about jobs with their laughable right of center policies? Outside of DC the unemployment rate is higher than 5%, 20 year olds don’t drive BMW’s and live in “luxury apartments” — unless you’re referring to Wall St.’s suburbs like Long Island. I suggest you stop listening to Goldman Sachs, frankly there is nothing more frightening than to see you constantly quoting them. Besides, how are you going to rent a foreclosed ranch two hours away from a city for 2 grand a month — do you say “stainless steel appliances” and the last twenty years melt away or does the principal get written down via bankruptcy or inflation as it has to?


  8. PhillyCooke says:

    But who’s the landlord?
    Do Fannie and Freddie have repair people on call to fix water pipes that break? And do they have them in every market around the country? I like the kernel of the idea, but there are lots of obstacles.


    • Jared Bernstein says:

      True, re obstacles. Though Fan, Fred, FHA already have about 300K foreclosed properties on their books which they have to maintain, so this maybe isn’t a big new hurdle. They outsource the upkeep and maintanence to a number of national and regional companies.


  9. Mary says:

    Maybe you will find this report helpful, esp. re. renting.
    http://www.jchs.harvard.edu/publications/markets/son2011/son2011.pdf


  10. Apartment for Rent in the Philippines says:

    Why not the banks flood the market with housing assistance? Surely, they won’t. :)


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