In a press release dated August 10, 2011, The Federal Housing Finance Agency is seeking comment on the idea of transitioning foreclosed homes into rental property, by selling the houses off to investors, who would then be required to offer them as rental property.
FHFA oversees Fannie Mae and Freddie Mac, the two GSE’s who own an estimated 250,000 foreclosed homes at present. The U.S. taxpayers have paid an enormous price to keep the two housing finance giants afloat, and the huge inventory of foreclosures has continued to lose value.
The Obama Administration is seeking potential solutions to the housing crisis. The idea is to sell the homes off to private investment companies who would then be required to hold them for rental.
While on the surface it sounds simple, this is a difficult mandate to place on a private business. Homes are sometimes ideal for rental, but many are best used for retail housing. Adding tens of thousands of rental homes to newer subdivisions would tend to drive the value of the neighborhood lower. It is a long standing rule of the housing business that rental properties tend to bring neighborhoods down in value, when there are too many of them in one area. An indiscriminate dumping of homes on the rental market could have a number of negative consequences at the local level.
From the point of view of an individual real estate investor, this could spell big trouble. Adding as many as 250,000 houses to the inventory of available rental properties would almost surely drive rental rates down even further in most metropolitan areas. On the surface this would seem to be a good thing for tenants, but it could push existing landlords with marginal cash flow over the edge, resulting in a wave of new foreclosures for existing rental property owners.
Real estate agents may find lots of new competition from rental properties, which could further suppress housing prices. It would appear that the organized real estate industry might resist this idea, since it’s impact on the the local housing market is likely to be negative, at least in the near term.
According to data on Zillow.com rental rates are down significantly since 2006. Many areas have seen drops of more than 15%. Some are down more than 20%. Based on this data, it would seem that adding a large amount of new inventory to the rental market is the equivalent of moving the deck chairs around on the Titanic.
The idea being proposed assumes that there is adequate demand for rental property, but when we are talking these kinds of numbers, it is anyone’s guess how this could alter the dynamics of the rental property market. Locally, impact will be wide ranging.
The FHFA said in their press release that they are seeking public comment on this idea.
My personal comment is that moving large amounts of inventory to private investor owners and then requiring that they be used for rental will probably lead to “distressed” property selling prices. My estimate would be less than 50 cents on the dollar per property for sure. Likely around 30 cents on the dollar to make it “fly” with bigger investors. This would almost certainly undermine the mandate of Fannie and Freddie and FHFA to maximize the return to the taxpayers.
As a rental property owner / taxpayer, I would be in favor of having Fannie and Freddie get rid of their excess inventory. But I’d like to see it done as it was during the Resolution Trust Corporation years, when the properties were sold off at local auctions. The local markets must be able to assimilate the properties in order to avoid drastic reductions in rental rates. This means the properties should be sold to local investors, as the RTC did back in the early 1990’s.
We’ve got to do something. And I applaud the Obama administration for finally at least bringing up a discussion about what to do with all those foreclosures. It’s high time someone started paying attention to this. But this really needs to be done carefully to avoid unintended consequences for the rest of the housing market.