We never let a good idea get in the way of our egos here at Altos Research, so when the occasion arises to comment on the greater policy decisions facing the housing market, then why not?
At today’s AmeriCatalyst Housing Policy session, the discussion is centered on government policies towards homeownership. Sitting at my table during the panel, I did a little math that seems could solve all of the country’s mortgage woes. (Mom always said to aim high.)
- Homeownership rates peaked in 2005 at 69% – that is 69% of US households owned a home, compared to the 75-year historical trend of about 64% pre-housing bubble. That 5% differential equates to 6.5 million households (or 6.5 million homes).
- The housing market “shadow inventory” estimates are reaching the 6-7mln range, determined as the number of current mortgages that are currently delinquent and are expected to be foreclosed upon by lenders.
- Meanwhile, the net change in new renters remained unchanged during the bubble years – basically people that should have been renting were instead buying homes assisted by crazy mortgage schemes.
- Thousands of private sector investors and investment funds (yes, literally thousands) are capitalized and ready to invest in these distressed mortgages with buy-and-hold strategies, from the single-house, cash investor to specialized investment funds fueled by private capital commitments. These firms have an objective to buy the asset (i.e. the negative equity mortgage) and retain ownership for long-term capital appreciation. This means investing in the property to increase value as market conditions improve and profit (gasp!) from predictable future cash flows in the form of rental fee now and eventual resell into the market for a disposition gain.
- Coincidentally, these same underwater homeowners would strongly prefer to stay in their home, with an objective to re-purchase or own the home down the road.
- Investors buy the homes at distressed prices, sign long-term leases (risk and inflation-adjusted) with current occupants with a rent-to-own exit strategy over a 5-10 year horizon, applying portions of rent payments to eventual re-purchase.
- Rentals rates based on market factors will be considerably lower than current mortgage payment requirements.
- This enables the private sector to achieve their investment objectives of long-term capital appreciation and provides time of market conditions to improve.
- As of July 2009, there are 130 million US households (source: US Census) with an annual growth rate of about 1% per year – about 1.3 million new households for each percentage change. This means that even a conservative estimate of household formation provides support to bring today’s underwater mortgage-holders back into the homeownership fold within 5-6 years after reverting back to 64% homeownership rates.
Why this works:
- The private sector takes all the risk of the underwater mortgages – leaves expensive and inefficient government “solutions” out of the picture
- Current homeowners get to stay in their home with drastically reduced monthly payments, while providing a clear path back to homeownership.
Easy peasy lemon squeezy. Problem solved. What’s for lunch?