Friday, January 6, 2012

Fed Backs Conversion of Foreclosures into Rentals

The Federal Reserve’s latest report on the U.S. housing market indicates its advocacy for the bundling and selling of government-owned foreclosed homes to investors who can then convert the homes into rental properties. The report notes that the market is not expected to improve and that interest in rentals will continue to increase, thereby opening the door to a government investment opportunity. Some critics believe, however, that the ulterior motive here is to neutralize an area (rental costs) that accounts the for the Fed’s “core” inflation rate by placing more rentals on the market, thereby providing more room to print money in the event of a new fiscal emergency. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve’s new white paper about the U.S. housing market released just yesterday – The U.S. Housing Market: Current Conditions and Policy Considerations (.pdf) – contains the following paragraph and a good deal of supporting rationale for their recommendation to sell GSE-owned foreclosed properties in bulk to investors so that they can be converted in bulk into rentals.

The price signals in the owner-occupied and rental housing markets–that is, the decline in house prices and the rise in rents–suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

While, on the surface, this makes a good deal of sense after the nation painfully learned a few years ago that home ownership wasn’t what it was cracked up to be and, ever since, home prices have been falling while demand for rental properties has grown, a massive conversion of REO properties into rental properties would also have the convenient side effect of helping the Fed keep inflation low, giving it more leeway to print up another trillion dollars or so for the greater good, should the need arise.

How so?

Recall that, part of the reason that the housing bubble grew so big was that the inflation statistics include rental prices as a proxy for the cost of home ownership, a change that was made all the way back in 1983 and that forever changed how inflation is reported and how high home prices could rise (see this Seeking Alpha article on the subject from a few years back that still ranks quite high on a search of “owners’ equivalent rent”).

After years of being subdued because everyone wanted to own a home (and nearly did), lately, rents have been rising – up about 2 percent over the last year – and, since rents account for 40 percent of the Fed’s “core” inflation rate, you can see why lower rental prices might be in the central bank’s interest.

This blog post was republished with permission from Tim Iacono.

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