Keepin' It Real Estate: A Real Fix for Housing
By Andrew Jeffery Feb 19, 2009 10:10 am
Getting to the "bottom" of the housing market.
Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.
According to real-estate analytics website Realtytrac.com, foreclosures were filed on 2,330,483 homes in 2008, up 83% from the year before. The median home price in the US is $180,100 - which means 1,526,929 of those homes could be bought with $275 billion. And since foreclosures are centered primarily in areas with low home values, the true number of properties the bailout money could be used to buy is likely much higher.
While the logistics for such an outrageously common-sense solution to the nation’s housing woes are daunting, they’re no less challenging than the massive loan modification efforts already in place. And their results continue to prove underwhelming, at best.
Such a solution also addresses the rapidly mounting discontent over bailing out those homeowners who made bad decisions. Distressed borrowers wouldn't directly receive any taxpayer money - though they would indirectly benefit from the massive government expenditure in their community.
Cash would be funneled down to the local level, where cities and counties could more effectively distribute it. To be sure, local governments can be as bureaucratic and inefficient as Washington -- not to say corrupt -- but by allocating capital to localities, each community would be responsible for its own clean-up efforts.
Private investors, developers, nonprofits and real-estate professionals could compete for business, adding a free-market component to rescue efforts - and even spurring a little sorely-needed economic activity.
Some cities aren't content to wait for federal money to trickle down from the White House. Menlo Park, California, best known for its devotion to the bubble lifestyle, is considering using city money to buy and refurbish foreclosed homes.
The town, like many others in America, is split by a highway that acts as a major dividing line between the haves and the have-nots. While there are just 97 homes in foreclosure in Menlo Park, the vast majority are on “the other side of the tracks,” away from the mansions and quiet, tree-lined streets of West Menlo. The proposal will use money from a $2 million fund already seeded by developers who opted not to allocate units for low-income housing.
The city plans to tap Habitat for Humanity to refurbish the homes, using community volunteers and local experts to oversee the improvements. The president of the local Homeowners Association, Ash Vasudeva, said “When rehabilitation is going on, it uplifts the entire community.” A simple statement, but true.
And while this is one small city undertaking one small project, it could serve as a model for other communities around the country. Not to mention the fact that the mere announcement of $275 billion in real-estate investments would hasten the price discovery the housing market so sorely needs.
Furthermore, banks stand to gain little from such a use of public funds - which could be why such a plan has yet to be proposed on Capitol Hill. When a bank forecloses on a home, JPMorgan Chase (JPM), Wells Fargo (WFC) or Citigroup (C) is forced to write the asset down to at least the amount of the outstanding loan. But since most properties are worth far less than the loan amount, selling the property at market prices would require further writedowns.
So, as banks soak up billions in bailout money under the auspices of massive loan modification efforts aimed at stemming foreclosures, vacant homes lay in disrepair, vagrants loot the pipes - and communities continue to deteriorate.
But instead of allocating funds for such grassroots efforts, Washington continues to issue broad, vague orders aimed at helping many, but in very small amounts. Such programs have failed before, and they'll fail again.
Maybe it's time for a new approach.
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2009-02-19 10:03:12
$275 billion in real estate investments would hasten the price discovery
Jeff, I am so confused by your writing. It is almost like you have a split personality.
In some of your articles you sound like you really understand the housing crisis and then you write stuff like this.
Let's be clear...there are TOO many houses and they are priced way TOO high. That is THE issue.
How does the government (any government) injecting money into this system to artificially support this unsustainable imbalance bring about price discovery???
These houses don't need to be rehabilitated, they need to be bullldozed.
I understand that reality is harsh but come on, its reality. Don't we HAVE to accept it...
sooner or later?
2009-02-19 10:43:47
$275 billion in real estate investments would hasten the price discovery
i believe the point is that if you're going to use taxpayer money to aid in alleviating foreclosure, it might be better spent in just buying the properties that are in that statistic, as opposed to trying to write down principal or buy down interest rates.
i could be wrong, but that point makes perfect sense to me. if we're going to spend a trillion on housing (eventually), buy the properties off and auction them to the highest bidder. whatever money you recoup, goes back to the taxpayers.
it has to be better than the current situation. the problem with it is, that the way the housing bailout is setup, it actually helps the big banks, and hurts the small businessman and smaller banks (you know, the ones who didn't take stupid risks?). see, Everyday Joe, that might want to buy one of these foreclosures, borrow the money from Hometown Bank, fix the house up and sell it, doesn't lobbyists in Washington. But BofA does. So they're going to get theirs first. The little man can gobble up whatever crumbs are leftover.
i understand your point, that in a true free market economy we would let the chips fall where they may. but we don't live in a true free market economy, and our government is going to spend a lot of our money on this issue, whether you think it's the right thing to do or not.
i could be wrong, but that point makes perfect sense to me. if we're going to spend a trillion on housing (eventually), buy the properties off and auction them to the highest bidder. whatever money you recoup, goes back to the taxpayers.
it has to be better than the current situation. the problem with it is, that the way the housing bailout is setup, it actually helps the big banks, and hurts the small businessman and smaller banks (you know, the ones who didn't take stupid risks?). see, Everyday Joe, that might want to buy one of these foreclosures, borrow the money from Hometown Bank, fix the house up and sell it, doesn't lobbyists in Washington. But BofA does. So they're going to get theirs first. The little man can gobble up whatever crumbs are leftover.
i understand your point, that in a true free market economy we would let the chips fall where they may. but we don't live in a true free market economy, and our government is going to spend a lot of our money on this issue, whether you think it's the right thing to do or not.
2009-02-19 11:00:51
$275 billion in real estate investments would hasten the price discovery
Matt,
Do you accept my premise that there are simply too many houses and that they are priced too high?
In addition, I believe that if millions of houses were bulldozed by the government that this still does vrtually nothing to address the pricing problem. The way I see it we need to reduce the number of existing houses AND allow prices to fall substantially.
If you accapt this then how does the government doing ANYTHING to sustain the status quo 'fix' the problem?
Another way to look at it is that, yes, the banks are part of the problem but so are the 'little guys' who bought houses they can't afford and so is a government that believes the American Way of Life is sustainable...let alone moral.
Its not that the system is broken and needs to be fixed. Its that the system is fundamentally flawed and if we go back to any semblance of the kifestlye of the last couple of decades we are only going to face an even worse crisis down the road.
How long will we continue to try to kick the can down the road and pretend that it 'fixes' anything?
2009-02-19 11:26:17
$275 billion in real estate investments would hasten the price discovery
David,
We are supposed to resign ourselves to the fact the government is going to do what it wants, and we must just accept that.
I get the feeling that Americans will accept most anything the government takes from them and gives to someone else.
We are supposed to resign ourselves to the fact the government is going to do what it wants, and we must just accept that.
I get the feeling that Americans will accept most anything the government takes from them and gives to someone else.
2009-02-19 11:47:00
$275 billion in real estate investments would hasten the price discovery
i certainly do understand, and agree with your premise. 100% as a matter of fact. i have enough land to grow myself a garden and hunker down! lol
my point is basically trying to work with what they're doing. they are not going to overnight come to the realization of what you and i know to be true already. it doesn't buy them any votes. it makes them look bad and lose face. for some reason politicians of every ilk do not know how to say "i was wrong, i screwed up, let's fix the problem".
but standing on the other side of the fence (even though we know it's the right side of the fence) throwing rocks isn't going to effect any change either. these guys don't speak the language. it's like telling a 17 year old they're wrong. it goes in one ear and out the other.
IMO, somebody has to figure out a way to perform damage control 1st, and then a way to come up with a solution that the politicians are able to take credit for. otherwise, we're gonna continue kicking that can down the road for a long time.
my point is basically trying to work with what they're doing. they are not going to overnight come to the realization of what you and i know to be true already. it doesn't buy them any votes. it makes them look bad and lose face. for some reason politicians of every ilk do not know how to say "i was wrong, i screwed up, let's fix the problem".
but standing on the other side of the fence (even though we know it's the right side of the fence) throwing rocks isn't going to effect any change either. these guys don't speak the language. it's like telling a 17 year old they're wrong. it goes in one ear and out the other.
IMO, somebody has to figure out a way to perform damage control 1st, and then a way to come up with a solution that the politicians are able to take credit for. otherwise, we're gonna continue kicking that can down the road for a long time.
2009-02-19 12:00:56
grass rot funds
if washington allocated funds on a grassroot basis. we would see that many states have very small problems and the most funds are going to support/bailout californication's hyperhousing inflation!
2009-02-19 13:56:39
Is the equation correct
The equation supporting the arguement is a bit suspect. This is apples times oranges, while both numbers are true the product is false.
You could construct an equation using the average value of the loans in default, or the average assessed value of the homes, or some other value that is in relationship to the actual default homes in order to derive a rough estimate of the percieved benefit of taxing $275B from peoples pockets.
I doubt that national median value homes are the problem (especially in Menlo Park, there the median is probably x3+ the national).
I do agree with the conclusion...its time for a new approach, but we probably don't agree on that approach.
You could construct an equation using the average value of the loans in default, or the average assessed value of the homes, or some other value that is in relationship to the actual default homes in order to derive a rough estimate of the percieved benefit of taxing $275B from peoples pockets.
I doubt that national median value homes are the problem (especially in Menlo Park, there the median is probably x3+ the national).
I do agree with the conclusion...its time for a new approach, but we probably don't agree on that approach.
2009-02-19 14:01:59
$275 billion in real estate investments would hasten the price discovery
Hi David,
You bring up a good point, and I believe here is one distinct difference between the housing market and, say, the stock market. If the government announced a massive program to buy common stock in companies all over the country, stocks would likely rise. In housing, however, a market far more disjointed where each transaction is unique, I do believe this would cause a race to the bottom.
In every market where there has been a sharp rise in transactions, there has also been an acceleration of price declines. Markets were so illiquid that true prices could not be discovered. I recognize that it does sound a bit counter intuitive, but I am going off the data I see every day.
To think about it another, way, imagine a market where there are loads of foreclosures, and the government steps in to buy them for refurbishment. As the government takes supply out of the market and buyers get excited about the prospect of the market recovering, sellers will take advantage of the renewed demand and sell into it. We are seeing this now in many markets, as low interest rates have spurred buying activity, and that buying activity has brought sellers out of the woodwork, along with the buyers.
As you say, there are too many homes and they're priced too high. The more transactions we have, the quicker true prices will be found since supply far outweighs demand. The trouble is that the spread between the bid and the ask are just too wide -- increased liquidity will help this.
As for bulldozing, on the aggregate, you are right, there is too much supply. But there is a big difference between urban areas like Oakland, CA, and McMansion developments in the outskirts of Phoenix. The latter will likely have to be demolished, but there wasn't ever much of a community there in the first place. The former, however, have boarded up houses all over the place, which are ripe for vagrancy, crime, etc. Its not practical to bulldoze these homes, all it vacant lots aren't a whole lot better for a community than a beat up house.
I believe strongly that by the end of this, we will see the sort of federal (or localized) land bank-type programs I discuss. Its just a question of what type of program it is -- a bank for empty land in the exurbs, or community redevelopment in cities and towns.
Ultimately, the challenge is looking at the big picture issues while recognizing that each local area represents its own unique sets of problems, challenges and solutions.
Andrew
You bring up a good point, and I believe here is one distinct difference between the housing market and, say, the stock market. If the government announced a massive program to buy common stock in companies all over the country, stocks would likely rise. In housing, however, a market far more disjointed where each transaction is unique, I do believe this would cause a race to the bottom.
In every market where there has been a sharp rise in transactions, there has also been an acceleration of price declines. Markets were so illiquid that true prices could not be discovered. I recognize that it does sound a bit counter intuitive, but I am going off the data I see every day.
To think about it another, way, imagine a market where there are loads of foreclosures, and the government steps in to buy them for refurbishment. As the government takes supply out of the market and buyers get excited about the prospect of the market recovering, sellers will take advantage of the renewed demand and sell into it. We are seeing this now in many markets, as low interest rates have spurred buying activity, and that buying activity has brought sellers out of the woodwork, along with the buyers.
As you say, there are too many homes and they're priced too high. The more transactions we have, the quicker true prices will be found since supply far outweighs demand. The trouble is that the spread between the bid and the ask are just too wide -- increased liquidity will help this.
As for bulldozing, on the aggregate, you are right, there is too much supply. But there is a big difference between urban areas like Oakland, CA, and McMansion developments in the outskirts of Phoenix. The latter will likely have to be demolished, but there wasn't ever much of a community there in the first place. The former, however, have boarded up houses all over the place, which are ripe for vagrancy, crime, etc. Its not practical to bulldoze these homes, all it vacant lots aren't a whole lot better for a community than a beat up house.
I believe strongly that by the end of this, we will see the sort of federal (or localized) land bank-type programs I discuss. Its just a question of what type of program it is -- a bank for empty land in the exurbs, or community redevelopment in cities and towns.
Ultimately, the challenge is looking at the big picture issues while recognizing that each local area represents its own unique sets of problems, challenges and solutions.
Andrew
2009-02-19 14:03:42
grass rot funds
P -- true, but ultimately that's where the money is being sent right now, albeit via mortgages and not actual real estate. Yes, California will get a lot of the help -- but hey we're broke!
2009-02-19 14:06:27
Is the equation correct
Hi Niels,
Yes, using the median home amount is a rather blunt tool. But I do believe it illustrates that the money would go a long way if you applied it to real estate, rather than mortgages. Interesting, in the part of Menlo Park where the foreclosures are focused, home prices are actually in the $300k range -- above the median to be sure, but certainly a world apart from the rest of the city.
Ultimately -- you are right, we need a new approach. My suggestion may not be the most realistic, but what's being tried now certainly isn't working!
Appreciate the comments,
Andrew
Yes, using the median home amount is a rather blunt tool. But I do believe it illustrates that the money would go a long way if you applied it to real estate, rather than mortgages. Interesting, in the part of Menlo Park where the foreclosures are focused, home prices are actually in the $300k range -- above the median to be sure, but certainly a world apart from the rest of the city.
Ultimately -- you are right, we need a new approach. My suggestion may not be the most realistic, but what's being tried now certainly isn't working!
Appreciate the comments,
Andrew
2009-02-19 14:42:06
Is the equation correct
I did appreciate the shock value...with $275B you would think we could actually buy something of value with the money and not just watch it burn up.
2009-02-19 16:27:17
this could have been a great idea
At this point this approach may be too late.
Paying off credit default swaps has broken the US financial system's and the US taxpayers' back.
Paying off credit default swaps has broken the US financial system's and the US taxpayers' back.
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