Thursday, January 8, 2009

Does the Housing Market Benefit When Investors Buy Foreclosed Homes and Rent Them to Tenants?

Yes, it does. I wouldn’t have thought this question worth posting about since it seems so obviously true, but since Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller apparently disagree (see this Bloomberg article), maybe I should explain my reasoning. Calculated Risk agrees with me for some good reasons, but I have a couple more.

The Schiller and Stiglitz argument is that the speculators will sell the homes when prices recover, and the reentry of these homes into the for sale market will be a drag on price recovery. There’s no data in the Bloomberg piece, and the anecdotes all involve buyers who are renting out the houses they’ve acquired. Apparently, we would be better off if lenders held the properties vacant until owner occupant buyers can be found rather than sell the properties to landlords.

Everybody including me loves owner occupants, but the day when residential REO can be absorbed by owner occupant purchasers is a long way away. Employment is falling sharply in all the distressed markets: for example, here’s what’s happening in LA:


You are not going to have much residential demand in LA until employment is trending up again no matter what you do to incentivize owner occupant buyers (we could waive down payment and credit requirements, of course, but we know where that got us). It does neighborhoods no good to have lots of boarded up houses for years (just ask someone from Detroit what 60,000 vacant units have done for them).

My second objection is more subtle. I have previously argued that a relatively high percentage of single unit rental housing correlated with the size of the housing bubble in that market. For example, of the markets tracked in the Case Schiller Price Index, Los Angeles, San Francisco, and San Diego had the highest percentage of single unit rentals in 2000.

I believe the investors that owned those units were probably sellers during the bubble days, and that the purchase of REO by investors is a return back to the previous equilibrium rather than a new direction. Unfortunately, we’ll have to wait a while for data and there are a lot of moving parts so we may never know conclusively.