Our first city-dwelling President has finally decided to rent. Last week, the Obama Administration announced a plan to place its million plus inventory of government-backed foreclosed homes on the rental market. If executed well, the initiative, as Brad Plumer notes, would bring relief to the two weights pulling the housing market on either side. Dwindling home prices would rise once the excess supply is removed; and rental prices, rising rapidly in some cities, would slow with the market influx.
But the plan won't fall on the nation like a big, stimulative blanket. Instead, it will strike different regions in very different ways, likely boosting some cities while falling flat in others. The plan may do little to assist the cities stuck in the thickest morass of the housing crisis. And the most telling barometer of the program's success may be its impact on struggling suburbs.
For observers of housing policy, the proposal was a blip of relief. Anything would be when compared to the colossal disappointment of HAMP. Jared Bernstein, the former chief economist for Biden, went to bat for the proposal (twice), and Dean Baker, the liberal economist who has long pushed for renting solutions, struck an optimistic tone. Kevin Drum was understandably skeptical about the prospects of moving private investors to purchase and upkeep a blighting (if not blighted) housing stock.
Daniel Immergluck, a professor at Georgia Institute of Technology who has extensively researched foreclosures, shares some of this skepticism. But his primary concern is that, in some areas, a turnover of real estate owned (REO) properties to private hands, without proper oversight, could simply lead to a stock of neglected rentals in already depressed metro markets.
He has analyzed the growth of REO properties in metro areas in the wake of the mortgage crisis. "Hot" or "strong" metro areas, those that experienced a rapid rise in housing prices, accumulated REOs at an alarming rate. Immergluck prefers the apt term "boom-bust" for these cities. Weaker markets, like those in St. Louis and Cleveland, were better able to stave off foreclosures. (Although, state policies play a major part in discrepancies across cities.) Homeowners in these cities faced lower borrowing costs and fewer underwater mortgages.
The list of the top 25 metro areas with government-backed REOs, yanked from FHA data, supports these findings, with many of the boom-bust cities clustered around the top. (FNMA is Fannie Mae and FHLMC is Freddie Mac):
Enterprise/FHA REO by MSA Listed as of 07/18/2011
FHA REO Property Count | FNMA REO Property Count | FHLMC REO Property Count | Total REO Property Count | |
Atlanta-Sandy Springs-Marietta | 1,388 | 3,585 | 931 | 5,904 |
Phoenix-Mesa-Glendale | 211 | 3,584 | 606 | 4,401 |
Riverside-San Bernardino-Ontario | 94 | 2,549 | 398 | 3,041 |
Las Vegas-Paradise | 216 | 2,416 | 337 | 2,969 |
Chicago-Joliet-Naperville | 412 | 1,837 | 584 | 2,833 |
Los Angeles-Long Beach-Glendale | 24 | 1,670 | 304 | 1,998 |
Houston-Sugar Land-Baytown | 288 | 1,138 | 194 | 1,620 |
Minneapolis-St. Paul-Bloomington | 152 | 1,095 | 370 | 1,617 |
Warren-Troy-Farmington Hills | 116 | 1,186 | 312 | 1,614 |
Detroit-Livonia-Dearborn | 189 | 1,058 | 145 | 1,392 |
Sacramento--Arden-Arcade--Roseville | 35 | 1,091 | 228 | 1,354 |
Seattle-Bellevue-Everett | 82 | 1,002 | 236 | 1,320 |
St. Louis | 200 | 697 | 172 | 1,069 |
Denver-Aurora-Broomfield | 170 | 619 | 216 | 1,005 |
Dallas-Plano-Irving | 295 | 565 | 136 | 996 |
West Palm Beach-Boca Raton-Boynton Beach | 28 | 795 | 129 | 952 |
Tucson | 104 | 628 | 154 | 886 |
Tampa-St. Petersburg-Clearwater | 150 | 554 | 141 | 845 |
Orlando-Kissimmee-Sanford | 43 | 583 | 138 | 764 |
Kansas City | 159 | 507 | 95 | 761 |
Birmingham-Hoover | 176 | 468 | 110 | 754 |
Ft Lauderdale-Pompano/Deerfield Beach | 37 | 563 | 125 | 725 |
Oakland-Fremont-Hayward | 8 | 563 | 146 | 717 |
San Diego-Carlsbad-San Marcos | 9 | 557 | 101 | 667 |
Indianapolis-Carmel | 284 | 281 | 77 | 642 |
Not all of these REOs will jump gracefully into the private market. The Obama plan would work best in cities with strong rental demand that were well insulated from the housing bubble, like Boston. In Seattle, where the price-to-rent ratio is rapidly expanding, the proposal could do wonders. (David Leonhardt looks very prescient in his note about the city: as foreclosure rates dropped this year, Seattle's has risen dramatically.)
Of course, the inverse is also true. "The worst thing to do," Immergluck told me, "is to flood the market in high-vacancy markets."
Metro areas with rental vacancies above 15%---Birmingham, Detroit, Houston, New Orleans, Orlando and Toledo---also have sizable stocks of government-backed REOs, larger negative equity totals and relatively high jobless rates (with Houston as the notable exception). In these cities, where rental demand is weak or nonexistent, an influx of new rental properties would do little to restore the housing market. And real estate investors will not want the extra weight on their balance sheets. Here, demolition---the "unsavory" tactic of bulldozing vacant homes, something shrinking Michigan cities have been trying for a few years---may, perversely, be the best option.
Another interesting trend emerges from recent research on REOs. Like housing prices, foreclosure rates can vary widely across a single city or metro region. In most major cities, foreclosures are clumped mostly in the center. But in the "boom-bust" metros, REO density is relatively, and significantly, high in the suburbs.
If the Obama plan starts up joint-ventures with the private sector, as it aims to do, it is these suburban hotbeds that concern Immergluck the most. "There's not a lot of good experience out there with large-scale, single family housing," he said of the private rental market. Atlanta, a city in the midst of taming its crippling sprawl, could be a place where the Obama plan flops. "Most of the rental property in the city of Atlanta is scattered-site, single family house," he added. "And most of it is very bad."
While the research on REOs is scarce (coupled with the usual academic lag, data on post-recession foreclosure policy is frustratingly slim), the little available findings shows a strong correlation between community resources and foreclosure prevention. And this helps explain the growing glut of suburban REOs. An Urban Institute study from last year found that homeowners involved with National Foreclosure Mitigation Counseling (NFMC) were far more likely to ward off foreclosure. Yet Congress docked $88 million from HUD's counseling programs in the 2012 budget. And while the NFMC was kept afloat, the agency was allocated $15 million less than it asked for.
Foreclosure resources, like counseling, are simply more abundant and available in urban cores than in suburbs. If the REO rental plan does work, U.S. suburbs, as John McIlwain points out, will no longer be the sole domain of homeowners. But there's little evidence that the Obama plan will help metro policymakers make their badly needed adjustments to this changing landscape.