Elementary economics teaches about tradeoffs—using more resources for one purpose (say, more food production) means that less is on hand for another (say, clothing). But tradeoffs don’t apply when resources go unused. Then, we can pour idle capital and human resources into valued goods without sacrificing the production of other goods. Grappling with today’s sluggish economy, policymakers have tried generating more demand for idle resources at the macro level, but haven’t done nearly enough to stimulate production and jobs in the residential construction industry.
At last, years after the collapse of housing prices and the massive loss of construction jobs, three government agencies are looking for new ways to reduce government’s inventory of foreclosed, single-family properties. Fannie Mae, Freddie Mac, and the Federal Housing Administration own about 250,000 foreclosed properties awaiting resale. Hundreds of thousands more units will likely be taken over by the government and become available in the next few years. At least another 250,000 foreclosed properties are awaiting sale in the private market. All these properties could provide families with housing instead of sitting empty (and, in some cases, looking the part). Meanwhile, continuing high rents are forcing many families to spend 40-50 percent of their incomes on shelter.
To increase the use of idle government properties and recover some of the massive losses on mortgages, the Administration is looking mainly for proposals from firms or nonprofit organizations to buy and rent out the vacant properties. The forward-looking information request sent out by HUD to the public seeks to take advantage of vacant and low-priced housing units instead of simply preventing more foreclosures. An important byproduct would, says HUD Secretary Shaun Donovan, be “…to alleviate the strain on the affordable rental market.”
HUD gets a gold star for this new strategy, but pursuing another approach at the same time—helping more families become homeowners—would take us farther still toward ending the housing crisis. Both approaches would reduce rents: as more renters buy vacant homes, demand for rentals will ease; renting out vacant units will increase the supply of rental housing. Both approaches are also likely to jack up demand for idle or underemployed construction workers, who’d be needed to repair and renovate the properties.
Right now, millions of families are paying more in rent than the monthly carrying costs of owning a comparable property. In 2009, 3 million families with children and annual household incomes below $30,000 were paying more than $800 per month in rent, according to the 2009 American Community Survey. If they can pay that much, they could certainly afford homes costing at least $115,000—well above the value of homes at the 25th percentile of the price curve. With better access to financing, they could take advantage of bargain prices on foreclosed or other properties, and homeownership would immediately cut renters’ housing costs and lock in great rates.
Contrast that rosy scenario with a government sell-off of properties to large companies to rent out. (See this, stating that the government is looking for projects of at least $50 million and up to $1 billion.) Doubtless, landlords would charge market prices for rents. True, current renters would see rent drops as the supply of rental properties grew, but that will take time and is no long-term protection against future increases in housing costs.
Some past efforts at promoting homeownership failed when bad mortgages supported housing costs far higher than monthly rents on the expectation of home price appreciation. But that doesn’t mean we can’t learn from past mistakes or take advantage of the current market context to make a major dent in family housing costs by using idle housing and human resources.
If you want particulars on the “voucher solution”, see my proposal to create 1 million homeownership vouchers that could be used to cover the carrying costs of homes up to the 25th percentile of area home prices. Given today’s low home prices, such a plan would cost no more than about $3 billion per year and could directly reduce the deficit if financed by phasing out the more costly and supply-oriented Low-Income Housing Tax Credit.
A second approach would use turnkey programs. Firms and nonprofit organizations would purchase homes, qualify the buyers through credit counseling and credit repair, ready buyers for homeownership, make modest renovations and repairs, and sell the properties. With this option, like the homeowner voucher, government could lay claim to a modest share of any capital gain (say 15-20 percent) when the property is resold. (Look here for an evaluation of a shared equity demonstration).
Among others, the Neighborhood Reinvestment Group of Cleveland Ohio is already trying the turnkey approach. Starting with unused housing from the Cuyahoga County land bank, the company hired local construction workers and trained the unemployed to spiff up the units, helped renters correct and raise their credit scores enough to qualify for low interest mortgages and down payment assistance, helped them get financing, and walked the families through the sale. Some renters took classes offered in financial literacy too. On average, the renters reduced their monthly housing expenditures by a minimum of 25 percent, including taxes and insurance. As the project scales up to involve scores of properties, it will create new jobs and training opportunities for underutilized construction workers.
Scaling up either homeownership initiative would be a move in the right direction, and either approach would help millions of middle income and near-poor families limit their housing costs. Finally, targeting demand policies toward housing can cost-effectively reinvigorate the broader economic recovery because of the close links among construction, manufacturing, and other industries.