by Gene Wunderlich
In response to the ongoing depression in our country’s housing market, the federal government has proposed yet another one-size-fits-all band-aid solution to a highly localized problem. As with most of the knee-jerk proposals they have attempted during the past 4 years, this program will not resolve the underlying issue and, in some cases, will make it substantially worse. I’m talking about the Federal Housing Finance Agency’s (FHFA) ‘REO Initiative’ pilot program destined for implementation in Los Angeles and Riverside Counties.
What the program proposes to do is effect a ‘bulk sale’ of REO (bank-owned) properties in select areas in order to ‘remove this overburden of inventory’ from the housing market and convert it to rental units for 5 years. Currently they are designated in Riverside County – more than 2,500 REO units.
Here’s the problem with that. Contrary to what the government tells us we are experiencing, we actually have a significant shortage of housing units for sale to begin with. There are areas of the country where this program might be effective in accomplishing what the government claims to want to fix, but our area is not one of them.
Following a record sales year in 2010 and continued strong demand in 2011 and so far in 2012, our inventory of homes for sale is between 2 and 3 months. A ‘healthy’ inventory is considered to be 6-7 months and we are waaaay under that. Taking a large chunk of properties off the market would only further reduce the opportunities for homebuyers to find a home and may well result in further price erosion and market deterioration.
But, how about the government’s second argument that we are suffering from a severe shortage of rental? Again, not true. Nearly 60% of current single family purchases are by individuals or small local investors who are buying the properties to either A) fix up and re-sell to qualified buyers, or B) keep as rental units.
And what is the logical consequence of some far removed institutional investor buying a group of 100 or 200 properties in Temecula? Well, they’d probably want to rent them out as quickly as possible so they would rent them out at the cheapest rate possible. While this may result in some short-term advantage for local renters, long-term it would result in another round of foreclosures as current owners who are barely covering their cost would no longer be able to do that and would lose those properties.
Finally, in what may be the crowning insult, the primary groups that would stand to benefit from these bulk sales are many of the self-same industrial investors whose bad practices enabled the housing implosion to begin with. So they would now be able to purchase the same properties they made bad loans on for a fraction of their original price and they’d be buying them with the bail-out money the government (read: you and me) gave them.
The National Association of Realtors® has submitted a letter signed by most of our local Congressional delegates to Edward DeMarco, acting head of FHFA, along with a bevy of other federal functionaries requesting that this ‘solution’ be applied only to carefully targeted areas of the country and to cancel any proposed sales in Los Angeles and Riverside Counties, and indeed in the whole state. We don’t want it. We certainly don’t need it – but when has that ever stopped the federal government from giving it to us anyway? Remember Ronald Reagan’s 9 scariest words – ‘We’re from the government and we’re here to help’. He was undoubtedly thinking about a program exactly like this.