Apparently I haven’t yet posted my idea for getting the real estate market back to some semblance of normal. If I have posted it, even I can’t find it by searching this blog.
In the run up to the bursting of the housing market bubble, our version of free market capitalism found a way to profit from enticing people who could not afford it to take out a mortgage and buy a home. They even went so far as to entice people to speculate on real estate to make a profit. This led to the construction of more single family homes than actually made economic sense.
When the bubble burst and the number of foreclosures rose drastically, we ended up with more vacant homes with no buyers in sight that could make a sound economic case for why they should own a house.
We could wait for the population to grow so that the fraction of the population for which it makes economic sense to own a house equals the number of houses available. This could take many years.
Meanwhile there are large numbers of people who have been cast out of their houses from foreclosures who need housing and could afford to rent these vacant houses if they were offered for rent at a reasonable price. There are also people who can afford to pay their mortgages, but see no reason to pay back a mortgage that is far larger than the value of their house. They abandon their house and let the bank take it. Presumably they won’t be able to buy a house for many years after they have defaulted, but they certainly have the cash to pay rent in nearly the amount they had previously been paying for a mortgage. (There are some tax issues that make it a little more complicated than this.)
The banks who are servicing the mortgages and are bringing on the foreclosures do not have the expertise (and perhaps not the legal right) to become landlords to renters. However, if there were a way for the banks to get some value out of the foreclosed homes that are sitting empty, you’d think they would jump at it.
You would think that some enterprising capitalists would come up with the idea of raising capital to buy these homes at foreclosure bargain prices, rehabilitate them as needed, and rent them for a market rate that the dispossessed former home owners could afford. The businesses that these capitalists would create would be able to hire experts in renting and managing single-family rental properties for a profit.
Admittedly there are problems to be solved before this simple explanation of the solution could be realized. If nothing else, our entrepreneurial capitalists are supposed to be very clever at solving problems that get in the way of establishing profitable businesses.
The banks are currently sitting on about $1 trillion dollars that they have borrowed at low interest rates from the Federal Reserve Bank. By sitting on, I mean they have invested in U.S. Treasury bonds that pay more interest than the Fed is charging the banks to borrow the money. If they could fund an enterprise at high enough lending rates and low enough risk, they could put that $1 trillion to work in the economy. They could actually be part of the funding sources for these companies that want to turn empty houses into money making rentals.
The new companies would not have to rely solely on borrowing as they could also raise some capital in the stock market, from venture capitalists, and from hedge funds. Real estate investment trusts might also be perfect vehicles for this.
Perhaps the banks just don’t want to sell the foreclosed homes at reasonable prices given the current real estate market. As long as the banks keep the homes on their books, they don’t have to admit that these assets are not worth nearly as much as they are pretending. This allows them to pretend that they are solvent and don’t need to raise more capital.
The entrepreneurs could work out some arrangement with the banks to buy bank stock along with the houses so that the banks appear to have the capital even though they sold the houses at far below the money they lent in mortgages.
Why the banks’ parent holding companies could even set up wholly owned subsidiaries to do the job of renting out and managing the properties.
As a last resort, perhaps the banks could retain some rights to capital gains on the houses above and beyond the net profits that would be owed to the companies buying the houses and renting them out. These retained rights could be carried on the banks’ books as capital assets that would compensate for the losses in the sale prices of the homes. An income producing property has a value based on the income that it is producing that may be different from its value as a property for sale. So the banks’ books might even be more truthful than pretending that the banks will someday recoup the money they lent for the mortgages.
Once the vacant houses were mostly occupied by renters, normalcy would be restored to the single home construction and purchasing market. This would presumably happen much faster than just waiting for population growth.
Not being an entrepreneur myself, you have to wonder why I can think up this solution, but no real entrepreneur has come along to put this idea into action. What do you think are the reasons why my idea won’t work?