Rent Our Way Out?

If you follow real estate markets in the US you’ve probably been reading lately about the idea that the hundreds of thousands of foreclosures currently held by government-backed entities Fannie Mae and Freddie Mac might best be turned into rentals–somehow.

You’ve also been hearing about:

 1) Average home prices continuing to decline overall

 2) Some markets seeing recent price stabilization, and even some very modest increases

3) Short sales growing as a proportion of distressed sales

4) The continuing huge backlog of foreclosures that continues to overhang the market.

So what does your friendly “insider” think about all this?  What’s the best path forward? Is creating a huge supply of additional rental properties part of the answer?

The only way I get to an answer on this is to ask some more questions. So, here goes. Stay with me and we’ll challenge our brains a bit.

First, is anyone surprised about the current state of our real estate markets? Remember, my focus is residential real estate–there’s a parallel story unfolding in commercial markets, but with some special differences.

Answer: We should not be surprised, and we should expect more of the same for at least several more years, if not longer. This is a numbers game and the market is in charge. There is a massive oversupply of homes to be bought–that’s been true since at least 2008. Buyers are buying, but they can’t keep up–even very low-interest rates and the lowest prices in several decades aren’t enough motivation to override the economic environment.

Take Phoenix, for example. A veteran writer for the blog Business Insider wrote today that so-called shadow inventory of yet to be foreclosed homes overhangs the market there.

He writes that although there is a lot of real estate industry talk about Phoenix stabilizing, “CoreLogic said in July that roughly 60,000 first liens in Greater Phoenix were either in default with a notice of foreclosure sale date or seriously delinquent by more than 90 days but without a sale date yet. None of these properties has been foreclosed and repossessed by the banks.”

Read more: http://www.minyanville.com/businessmarkets/articles/housing-market-home-prices-home-prices/9/1/2011/id/36233?page=full#ixzz1WizKw2DC

Here’s one other quick, but telling, anecdote. The same writer  recently polled housing industry experts in Phoenix who told him they expect the market to hit bottom in 2010. However, recent national polls of consumers by trulia.com and RealtyTrac showed well over half of respondents saw no bottom for the market before 2015! (PS – My boss, Gary Keller, said that two years ago.)

So, are the consumers right? You bet they are. There are an estimated 1.7 million properties still in the pipeline, headed for foreclosure, according to RealtyTrac.

Our Federal government’s take on this situation draws us back to the rental discussion. Seeming to admit they have no better solution than anyone else, the Feds have asked for suggestions on how best to move the massive portion of foreclosed inventory under the control of Fannie Mae and Freddie Mac.

The popular answer (maybe they had this answer before they asked) is “let’s find a way to turn them into rentals.”

Hmm, fascinating! The theory seems simple enough–if there aren’t enough buyers maybe there are enough renters. Rental occupancy rates and rent rates in many parts of the US seem to support this thinking.

But, were this to be the plan, major solutions would be needed first:

1) Why pays to put these properties into rentable condition?

2) Who has the property management capability to rent and manage tens of thousands–oops, make that hundreds of thousands–of rental properties?

3) Who is the landlord? The US Government? How does that help anyone in the grand scheme of things. Will a government that can’t collect taxes and build affordable jet fighters that fly be good at collecting rent? At maintaining properties? No. Of course they’ll farm it all out to private subcontractors, right? It’s a scary proposition–one that could bring new meaning to the Dept. of Defense’s legendary thousand-dollar toilet seat!

4) Are these properties to become rentals forever, or just until some unforseen time of recovery when the occupying  tenants (at that time) might be able to purchase them with government-backed bank loans?

When the distressed markets first grabbed our attention in late 2007 and early 2008, it seemed like the best hope for the future was–let the market work, and eventually this huge market downturn (in value) will pass.

Now, after working our way through it with very poor efficiency, are we starting to lose our collective nerve? We knew prices would fall–but fall this far?  We knew selling real estate would be tough, but this tough?

We can gain efficiency by getting smarter about how to complete short sales. More agents are learning the ropes–and helping one another get better at it. Some big lenders and servicers are now getting the hang of it too–and understanding the economic benefit for them. Transaction processing software is improving. These are good things, but buyers are still needed.

REO agents and banks have learned how to price and move REO (bank owned foreclosures), but the processing of foreclosures has slowed dramatically–adding to the shadow inventory build up.

Is it really possible that there will not enough buyers, now or ever, to cure the market monster that was created by greed, naiveté, and poor policy? Will be become a nation of renters? And will that change the direction of property values?

What do you think?

None of us knows; or if anyone does they aren’t speaking up.

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