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Friday, August 12, 2011

Public, or Private, Ownership of "Excess" Housing?

Wednesday, I introduced a straightforward proposal to turn the housing market around in a hurry.  John Krier, the author of The Simple Solution, is a semi-retired west-coast lumber industry executive who, as an owner of 14 rental units, stands to profit from the current rise in rents due to the shortage of rentals as "empty" housing numbers mount. He and I discussed this yesterday after I called him to let him know that I had received quite positive feedback from the office of a prominent national politician...they had reviewed the article and the full proposal and had forwarded it to their legislative staff in Washington.



The irony is that The Simple Solution, if enacted as proposed, would actually work to reduce those rents that Mr. Krier derives some of his income from. Once the empty properties are in the hands of investors, they will immediately be put on the market as rental properties, and this influx of more than 1.5 million new rental properties in less than a year will put downward pressure on rental rates, at least on the average.

Which brings us back to the last line of the Washington Post article I cited in the last post:
“The goal here isn’t to help investors. The goal is to provide quality affordable housing.” 
This comment is the key around which this rising debate will turn. It certainly appears that Washington politicians on both sides of the aisle are beginning to focus on the fact that rising rents in the economic downturn are one of the primary issues they must deal with even as they struggle to trim our national budget deficit. In trying to implement fixes to this problem, the profit potential has to be minimized in the mind of the public, while "affordable housing" must be the talking point.

And as both the Washington Post article and the Simple Solution proposal point out, the housing overhang of houses vacated by mortgage defaults is a boat anchor on housing prices...and sinking housing prices are dragging down the rest of the economy. And that anchor is getting larger...it's possible that the number of mortgage-default empty houses could double in the next year.

There are basically only three ways to deal with this issue. The first is to leave it alone and let the market clear of its own forces, which is probably the best way in the long run, but it would take many painful years to happen. Since no elected government can leave a bad situation alone, it is not likely that this course of inaction will take place.

The other two choices are variants of each other, with the basic premise that the government promotes acquisition and rental of these empty houses. In one choice, the government would be the primary "investor"; this course of action would likely involve, in some form, Fannie Mae and Freddie Mac becoming the de facto landlord.


Uncle Sam, landlord, looking for help


The pro side of this option is that it potentially offers Fannie and Freddie, and our government by association, a potential revenue stream to help offset the losses we have ensured through these agencies.  Also, a government rental company would theoretically ensure that only the most needy could benefit from this subsidized housing.

The con side of this is that some notorious government-subsidized housing projects of the past have soured our national confidence in this option. Although well-intended, subsidized government-managed housing tends to be taken advantage of by occupants and often results in poorly maintained properties that quickly lose most of their value.

The other alternative is to encourage the private sector to take on the risk/benefit proposition offered by these empty houses. Encouragement would come in the form of the tax credit as proposed in the Simple Solution. Pros of this idea include all those offered in the last post and in the detailed Simple Solution plan.

The primary potential drawback to the Simple Solution is the potential of fraud, which seemingly automatically occurs with every government program. In this case, strict oversight of the process must occur to ensure that the properties being awarded the tax credit are in fact foreclosed properties, and not properties that have been vacated with the intent of being re-purchased for the tax credit.

Another potential drawback to the Simple Solution is the potential for it to be watered down by reducing the tax credit or adding onerous stipulations to the purchase that deter potential investors. This is a very real possibility if legislators allow political considerations to override the need for profit potential that will drive the program.

Taken in total, The Simple Solution to the housing crisis, or a variant of it that stays true to the principal of encouraging private investment and profit to clean up the losses accruing from the defaults, seems to offer the highest likelihood of a successful outcome to any government effort to turn the housing market around. Let's hope our government can agree to tap the entrepreneurial spirit of private investors to help turn the economy around.

Our wood-based industries, and the millions of people formerly and currently employed by them, depend on a successful and expedient solution.

2 comments:

LenB said...

Letting the market set the pace might take a long time as contrasted by the very short time it took our "Wonders" in Government to screw the market up in the first place. Government directing the marketplace would, in my opinion, definitely take a very short time to make a bad situation worse.

Oversight??? Government oversight to prevent fraud ??? Now that is one real ippsy - pippsy Yankee Doodle oxymoron.

I'm sorry. I'm thinking back, having founded an Engineering company in '61 and having dealt with Government agencies for 45 years......it just can't happen.

Get the Government the Hell out of the way and let those who know how fix the problem.

John Krier said...

Dear Chuck
Re: Previous comment.

It is nice to hear from someone who has actually read the article before treating us to a knee-jerk ideological reaction (pro or anti-government) that enlightens no one and nothing. Lots of heat and no light.

We of the timber industry cannot wait for either the market or the government to fix the situation. Many houses, now empty will deteriorate to the point of tear down in the hundreds of thousands within a few short years. That may sound good to some but when one considers all the bureaucratic hoops that must be jumped through all that will do is add another 2-3 years to the recovery process.

Another risk is 600,000 starts could become the “new reality”. Businesses will adjust and the psychology of the market place will change for the worse

In other words we no longer have the luxury of complaining. We must help with solutions. Talk to your friends and colleagues, or anyone who will listen about the “simple Solution” or if there is something better out there, get it out in the open where the ideas can join the political conversation. Action, action,action and not tomorrow but now. That should be our watchword.
JLK