Can Renting Foreclosed Homes Cure the Housing Market?

The Obama administration is reportedly considering ways to encourage investors to buy foreclosed homes

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The housing market has been struck by a troubling phenomenon. As distressed borrowers lose their homes, they must rent. But all those Americans hitting the rental market are causing rent prices to rise. In the meantime, as the population of homeowners shrinks, more houses are hitting the market and prices are declining. The solution here seems obvious: convert all of those foreclosed homes into rental properties. That way, rent and home prices should both stabilize. The government is reportedly considering alternatives to encourage this outcome.

Government Solutions

One possibility would be for the government to act as landlord for all of the foreclosed properties that it owns through its agencies like Fannie Mae and Freddie Mac. This option has a slew of potential problems, however. First, it could be very expensive, as the government would have to create an infrastructure to manage rental properties. Second, the idea of the government as a landlord might not thrill everybody. But finally, it's not immediately obvious that the government would need to step in when private investors may be willing to do so.

And that brings us to another idea, explained by Nick Timiraos at the Wall Street Journal:

One proposal winning support among some federal officials would sell thousands of foreclosed federal properties to private investors who agree to rent them.

Investors would rehab homes, run the leasing process, and contract with national property management firms to handle day-to-day tenant demands.

The government could keep a stake in the venture, modeled on loss-share transactions by the Federal Deposit Insurance Corp. Officials have received interest from around a half-dozen private investors, according to people familiar with the matter.

Something like this could theoretically work. The biggest problem would be that it appears to require the blessing of the Federal Housing Finance Authority, which controls Fannie and Freddie. The Treasury cannot tell it what to do, so if it doesn't see such a program in the agencies' best interest, then it won't sign on.

An easier option might just be for the government to provide a simpler incentive to buy distressed properties outright. One thing you could do is to exempt rental income from taxes until the end of 2017 on properties was purchased after, say, August 1, 2011. That would make investing in a rental property even more lucrative and allow the market some time to heal before the investors might want to get out of the landlord business and sell the houses they own.

The Home Buyer Credit Debacle All Over Again?

But the bigger question is: why involve the government? Shouldn't the market be taking care of this problem itself?

Think about what we know: home prices are falling, but rental prices are rising. It doesn't take a degree in finance to figure out that this could be a very lucrative situation for investors. As this trend continues, buying properties to rent out will become a better and better investment. The government really shouldn't have to do much to encourage investors to buy properties to rent out, because the market will provide this result itself.

The other strong reason for allowing the market take care of this problem is our past experience with the government attempting to conjure up demand for houses: the home buyer credit. You have to stretch to consider that program as anything other than a massive failure. Although it appeared to be working while it was in effect, for about a year-and-a-half, as soon as it ended home sales plummeted and home prices began to decline again.

If the government attempts to prop up the housing market by giving an incentive to lenders, then a similar situation could result. If there is a natural bottom that home prices must find, then trying to prevent it from getting there will only provide temporary benefits. Why not instead just allow prices to decline until investors find them low enough that renting out homes is too lucrative an opportunity to pass up?

Image Credit: Syriloth/flickr