Friday, August 19, 2011

Investors Will Save the Housing Market - Counter Point


An open letter to Treasury Secretary Timothy Geithner was published in the Atlantic this past week that proposes a couple of alternative strategies to getting the housing market jump started. The author, Daniel Indiviglio, is an editor and regular contributor to the Atlantic on economic and housing market issues. While his credentials and credits are lengthy, I want to step out here and say that his letter on fixing the housing market is way off base.

You can read the article at the Atlantic online, but I’ll summarize his main points here.

1. The actions already taken by the Treasury are not sufficient enough to create a recovery in the housing market. (Agreed)

2. In order to fix the housing market we need to provide huge incentives for single family investors to buy up foreclosures and rent them out. (Not Agreed)

Now in all fairness Mr. Indiviglio has three components to his incentives for investors. These include tax breaks for income generated from rental homes, tax breaks on repairs made to rental homes and property tax breaks for rental homes.

I shouldn’t need to say more, since I hope most of the people that will read my blog will agree that this is just a giveaway to investors that might reduce the number of foreclosed homes on the market, but I’m not convinced it would be beneficial to the market in general.

My first point of contention is that Mr. Indiviglio appears to assume that housing investors are benevolent in their activities. His ideas ignore the enormous damage that absentee owners have on building communities of choice for renters and home owners. He ignores the slums that often get created when large percentages of homes are bought up by investors and only minimal rehab is completed. And, he ignores some very important economic principals.

Now I hate to challenge an economist on economic principals, but I think that Mr. Indiviglio appears to put to much weight on the “invisivible hand” of the market theory.  He seems to think that investors are tied into a beneficial and benevolent recovery of the housing market through factors like demand and competition. While that might be true in a functioning housing market, the reality is that competition and demand aren’t providing controls in our current market.

An investor today can go into most metropolitan markets and find large pockets of under priced homes to buy and convert to rental. Competition for these homes is not driving up prices in any significant manner. Investors are also finding that the construction of new homes isn’t keeping up with basic population growth or inmigration, so the demand of rental homes is very high. With little competition of homes to buy and high demand for rentals the scales are not balanced to provide incentives to investors to act in a benevolent manner. The invisible hand theory leaves only self-interest to drive investors decisions. So what are investors doing? They are buying up thousands of foreclosed homes already. But what they aren't’ doing may be more important.

In a market where demand is high and competition is low, investors are able to buy homes cheap and do little or no rehab in order to find tenants. Mr. Indiviglio would like us to think that if we provide them with tax breaks they might be willing to spend a little more on rehab. But there’s no incentive in the current market, and tax breaks are unlikely to drive additional rehab spending if investors know they can already do the minimum and make a good return on their investment.

Mr. Indiviglio’s other suggestions also don’t create sufficient return in order to drive investors to act in benevolent ways. Income taxes for investors are already dangerously low given the numerous corporate structures and write-offs that make rental home investment a lucrative business. Property taxes are also a area that investors have already learned how to game the system and create additional wealth through creative accounting and income reporting to local taxing entities.

In all fairness to Mr. Indiviglio, I’ll reveal my assumption that many, not all, but many investors are just slum lords. They may not be renting to drug dealers or criminals, but they are not generally interested in investing money into assets that already provide them with a good return on their investment.  Investors also rarely, if ever look at the community impacts that rental homes can have on a community. Whether it’s a small investor that buys one or two homes in the same neighborhood, or the corporate investor that buys up dozens of homes in a single neighborhood, there is no incentive for them to determine whether their activities have a negative impact on the community as a whole.

I wish I had a brilliant idea about how to fix the housing market to introduce as a counter point to Mr. Indiviglio. I certainly think that the Treasury’s NIBP program has helped thousands of families obtain housing for the first time in a very tough and risky housing market, and even gotten some multifamily rental developments off the ground in one of the worst bond markets we’ve seen since the 1980s.  The best part about the NIBP program is that it incentivizes investment from the private sector and creates minimal risk for the Treasury or tax payers. This is a strategy that I’m hopeful will be renewed in 2012 and maybe even see a relaxation in first-time home buyer requirements for a temporary period.

In summary, I’m hopeful that Mr. Indiviglio’s letter will be summarily ignored by the Treasury and Mr. Geithner.  I’m hopeful that new shoots are already starting to sprout in the housing market and that our long recovery will begin to show fruits, or at the very least bring hope to bond markets and community leaders soon. Finally, I hope that the Treasury, and other government entities, will learn from the programs that didn’t meet expectations and find ways to reduce regulation and increase program efficiency so that they may be used again, but with much better results.

Sincerely,

Dave

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