Wednesday, September 22, 2010

REO Rentals: The Overlooked Variable to Solving the Housing Crisis in the United States

Until recently, little or no consideration has been given to government policies that would promote renting as an alternative to homeownership to help solve the mounting problem of an oversupply of homes in the United States. However, a recent report written by Danilo Pelletiere for the Federal Reserve Board seems to provide a very strong case where the Fed would be remiss if it did not take note.

At the Crux of the matter is a gross overbuilding of housing over the last three decades fueled by easy credit to both builders and consumers. The Census Bureau has estimated that there are 131 million housing units in the country, but only 112 million households to fill these homes. This figure would imply that, at any given point in time, there are 19 million vacant homes (14.5% vacancy rate) out there… a daunting number that is at the heart of the housing crisis and neighborhood instability.

In his report, Pelltiere states that “Unlike agricultural commodities, which can be easily removed from the market to help stabilize prices, removing vacant homes-either proactively or through neglect….not only destroys the housing but can detract from the value of neighboring properties, leading to further price instability.” The key to neighborhood stabilization is to keep occupants living in the communities as much as possible.

There are a number of ways to accomplish increased occupancy of homes. Many resources have been thrown at loan modifications and other loss mitigation programs with mixed results at best. Renting back to the home borrower in exchange for the deed has also been a large focal point with only minimal results.
Because of the low success rates of these programs, there should be options to selling a property in an already flooded market. By offering vacant properties as rentals rather than for sale, perhaps young adults living at home would find the prospects of renting appealing, thus creating new households.

The primary obstacle to this plan is that much of the vacant home inventory is held by banks. Banks historically have not been in the property management business and seem to have little incentive to venture into this new arena. However, Pelltiere argues that “Policies to address these challenges should include stepped-up enforcement of bank-owned homes and technical assistance that focuses on being good local landlords.”

In addition, there are several high quality property management companies and associations that would gladly partner with banks, Fannie Mae, and Freddie Mac at local levels to help accomplish this objective. Last month, the National Association of Residential Property Managers (NARPM) proposed ideas to HUD Secretary Donovan to help increase the focus on rental strategies. We are hoping that this is seriously considered by the administration.

Pelltiere concludes his report well. “Renters are an integral part of most communities, and keeping rental properties occupied is as much a concern to the recovery of these places as maintaining homeowner occupancy,” he writes. “Plans and policies that accommodate just owners, whether directed at the recovery or instituted previously and for other purposes, will not help all the households that need assistance and will only delay a return to higher occupancy levels and housing market vitality.”

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