Renting Foreclosures? Another Stupid Idea

Given the bloody mess that is real estate market, the feds are now considering the idea of renting some of the housing inventory. This is a spectacular idea, for all the wrong reasons.

The slide into what has always smelled like a double dip recession was fueled in large part due to over-leveraged homeowners. Many underwater owners have tried to work with lenders, other have strategically defaulted and yet others are attempting short sales. To some extent, owners had some skin the game – not necessarily financial but at least their credit was at risk (granted some just don’t care). In short, many made an effort to find a solution.

Many also found that they could effectively live mortgage free while the foreclosure wheels grind along – the national average for folks living in homes prior to foreclosure and not paying is a year! As convoluted as it sounds, many receive incentives on top of that to leave the homes in decent shape. For the most part – and of course there are exceptions – homes are being taken into inventory that are largely intact. The bottleneck and trouble comes once they’re in “the system” and sitting vacant and neglected. Enter the rental idea and the spokesman Timothy F. Geithner (who is doing a fabulous job with the economy already)….

Greater flexibility in disposing of the houses will have other benefits as well, Timothy F. Geithner, the Treasury secretary, said. “Exploring new options for selling these foreclosed properties will help expand access to affordable rental housing, promote private investment in local housing markets and support neighborhood and home price stability,” he said in a statement announcing the new program.

Yeah sure.

No market stability or reduction of inventory results from Fed being a landlord. Instead, this simply prolongs the problem and adds to the financial burden of each home. Consider:

• Rented homes will require maintenance, that will fall to the owner (the Fed)
• These homes will require updating prior to rental
• These homes will require repair and updating after rental period terminates
• Can you even begin to imagine the potential lawsuits?
• Given the lack of expected appreciation – and even continued depreciation – in many markets, the Fed is not only holding onto a depreciating asset, it’s pouring good money after bad
• Renting does nothing to reduce inventory, that home remains on the books instead of being sold
• Owners tend to be more attentive to their homes than renters, it is reasonable to assume that these homes will degrade faster than if vacant but properly maintained
• Neighborhoods with high rental rates tend to see a decline in value and appeal of homes. While vacant homes can have an impact, that can be lessened with properly maintenance and motivation to sell.
• Evicting non-paying tenants can be more difficult and lengthy than evicting owners.
• Just as introducing a huge inventory to the sales market can drive values down and swamp any forward progress, renting on a large scale may do the same for the rental market.

This is an idea that’s been tried many times before on many levels all with the same with poor results. The better idea is to properly manage the vacant homes, maintain them to the same level as owner occupied homes and be genuinely motivated to sell them.  Instead of the banks taking a combative and cantankerous stance, price them correctly, hire enough competent people to handle the volume and act like you want to sell.

Tear the band aid off and price these homes to sell. Move them over a prescribed period at a prescribed rate that the economy can support and get on with it. Renting on the other hand……