Tag Archives: Ken H Johnson

Research Productivity in the Top 3 Core Business Real Estate Journals

The attached spreadsheet reveals the top research producers in terms of scholarship creation for the last five years in the leading Core Business real estate journals. The list is designed to serve as a tool for public policy makers (predominately state and federal government legislators and their staffs), industry practitioners, and trade associations to assist them in their placement of sponsored research. Additionally, the list should prove most helpful to College of Business Deans and University Presidents seeking to expand their school’s and/or university’s focus into the field of real estate.

(View and download the attachment.)

In no certain order of importance, the Top 3 Core Business real estate journals are defined as REE (Real Estate Economics), JREFE (Journal of Real Estate Finance and Economics) and JRER (Journal of Real Estate Research). While these journals cover a broad list of topics, they can be said to focus on the business side of real estate covering topics such as market liquidity, property pricing, duration analysis, likelihood of a transaction, mortgage markets, income-producing property, REITs, and buyer versus renter markets, among other issues. [i]

The list concentrates on the concept of scholarship creation. Where the creation of scholarship is defined as the process of developing a research question, testing this question, submitting the work for blind peer review, and the acceptance of this work by a scientific academic journal. Thus, publication acceptance is a necessary and sufficient condition for an author being credited with the creation of scholarship. For each manuscript, each author associated with that particular work is credited with the production of one piece of scholarship. This is not the usual convention in articles that seek to rank authors and universities research productivity. Typically, the convention is to rank by metrics such as page counts and weighted shares. However, this list is not designed to be a ranking tool. Instead, the list is designed as a tool that is easily decipherable and useful to the parties outlined above. [ii]

Articles in the Top 3 Core Business real estate journals published between January 1, 2007 and December 31, 2011 plus forthcoming articles accepted by 12-15-2011 are itemized in the list.[iii] Tentatively, the list will be updated each year during the month of December. For example, the list should next be updated for articles published between January 1, 2008 and December 31, 2012 plus forthcoming accepted papers appearing on the three Core Business real estate journals’ websites on or before 12-15-2012. In this way, the list constantly reflects current research productivity. Additionally, the list contains other information such as manuscript titles to assist list readers in determining the area or areas of expertise of individual researchers.

If unaltered, the list in spreadsheet form may be copied and redistributed without restrictions. Other questions including (but not limited to) possible corrections can be directed to:

Ken H. Johnson
kenh.johnson@fiu.edu

ENDNOTES


[i] Urban Econ journals are not covered in this list. While there is considerable overlap between Core Business and Urban journals, Urban Econ journals tend to concentrate in areas such as urban growth models, the social benefits of ownership, and agglomeration.
[ii] There is, of course, enough information within the provided spreadsheets for any interested party to produce the traditional ranking metrics. In fact, we encourage such work as it will serve as additional information on the most current producers of Core Business real estate research.
[iii] Forthcoming articles are those articles that have been accepted for publication but that are not yet in print. The criteria employed for the list requires that the piece be listed as forthcoming on the three journals’ websites by 12-15-2011.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

Buyer or Renter Nation?

A Little More on Wealth Accumulation and Homeownership

Last week’s posting (Homeownership Leads to Greater Wealth Accumulation: But How?) concentrated on how homeowners, on average, accumulate more wealth than renters. The gist of the posting was that in an environment where most do not save homeownership creates a “forced piggybank” for owners through amortization of their mortgages and prepayment of principal. This conclusion comes from ongoing research being conducted by Beracha and Johnson. [i] Additional evidence indicating that homeownership is really a savings vehicle is provided when Beracha and Johnson’s Buy vs. Rent model[ii] is employed to estimate the probability that renting is the superior economic decision and leads to greater wealth.[iii] In particular, Beracha and Johnson balance the benefits of ownership against the costs of homeownership and compare wealth accumulation through home equity against wealth accumulation through investments created by a comparable renter. [iv] The model assumes an eight year holding period. [v]

Through thousands of Monte Carlo simulations (an advanced statistical technique where past outcomes are used to predict future results), Beracha and Johnson are able to derive the probability that renting will outperform homeownership in terms of wealth accumulation for each of the 30 plus years of the study. When the probability for a given year is 50%, there is no clear winner between ownership and renting. When the probability is greater than 50%, renting wins. When the probability is less than 50%, ownership wins. The results are presented in the graph below:

Probability That Renting is Preferred to Buying - graph

The top line in RED depicts the probability that renting will outperform ownership in wealth accumulation assuming that renters reinvest rent savings (difference between rent payments and mortgage payments). Clearly, over the vast majority of the study period and under this very strict assumption of reinvestment of rent savings renting provides the greater probability of wealth accumulation.

The bottom line in BLUE, however, depicts a different and perhaps more realistic outcome. In particular, when renters are not forced to save and reinvest their rent savings and are instead allowed to spend on consumption, ownership becomes the probability winner in all of the wealth accumulation races.

Implications

Evidence is continuing to mounting that renting is a better path to wealth accumulation in a strict “horserace” between buying and renting where renters are forced to reinvest any rent savings. Therefore, for those that have the discipline to monastically reinvest rent savings, renting is probably the better path to wealth accumulation. However, in perhaps a more realistic setting where renters can spend on consumption (beer, cookies, education, healthcare, etc.), ownership is the clear winner in wealth accumulation. Said another way, homeownership is a self-imposed savings plan on the part of those that choose to own.

ENDNOTES


[i]Eli Beracha and Ken H. Johnson, 2012, Beer and Cookies Impact on Homeowners’ Wealth Accumulation, ongoing research.
[ii]Eli Beracha and Ken H. Johnson, 2012, Lessons from Over 30 Years of Buy Versus Rent Decisions: Is the American Dream Always Wise? Forthcoming in Real Estate Economics.
[iii]The model results simply need to be inverted in order to interpret the results as to when buying leads to greater wealth accumulation.
[iv]See Beracha and Johnson (2012) for exacting details of their Buy vs. Rent model.
[v]The holding period can be varied with little change to the results. This issue will be addressed in future postings.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

Homeownership Leads to Greater Wealth Accumulation: But How?

Several real estate economists have shown that the average homeowner accumulates more overall wealth than the average renter. [i] However, it is not clear how this is done. Is it that owned property usually appreciates at such a rate that after considering leverage returns to ownership are extraordinarily high? Said another way, might homeowners accumulate more overall wealth because ownership is a great levered equity creator through property appreciation? Or, is it that owners acquire greater wealth, on average, because they are systematically paying down a mortgage thereby creating equity thanks to loan amortization? In other words, paying off property creates wealth.

In ongoing research being conducted by Beracha and Johnson,[ii] these and other questions concerning homeownership and the accumulation of wealth are being investigated. In earlier research, Beracha and Johnson show that renting is the superior investment strategy; however, in this earlier strict horserace between buying and renting, a very bold assumption is made. Specifically, it is assumed that any rent savings (from lower rent versus mortgage payments) are reinvested without fail and after balancing all of the costs and benefits from ownership and comparing them to renters’ portfolios from reinvesting rent savings, renting wins.

The question, however, very quickly becomes that in a setting where Americans generally save less than 5% of their disposable income, is this assumption realistic and how might the removal of this reinvestment decision alter the outcome of the horserace between buying and renting? As part of their current research, this question is directly addressed. In particular, Beracha and Johnson find that after allowing renters to spend any rent savings on consumption (beer, cookies, healthcare, education, etc.), ownership leads to greater wealth accumulation, on average. The graph below highlights this finding.

Renters' Portfolio Values Divided by Owners' Sales Proceeds - graph

The graph looks at the ratio of renters’ portfolio values to owners’ proceeds from sale for the entire U.S. between 1978 and 2010 both with strict reinvestment of rent savings and without reinvestment of rent savings.[iii] Clearly, numbers greater than 1 indicate that renting leads to greater wealth accumulations, while numbers less than 1 indicate that homeownership creates greater wealth, on average.

When renters are forced to reinvest (top line in the graph), the results confirm the earlier findings of Beracha and Johnson (2012). That is, in a strict horserace between buying and renting, renting wins in the vast majority of cases. However, when renters are allowed to spend rent savings on consumption (i.e. economically act like the typical American consumer), homeownership wins in virtually all instances. Notice that in the bottom line of the graph (no reinvestment), the renters’ portfolio values divided by owners’ sale proceeds is greater than 1 for only four of the 32 years of the study. Thus, when renters are allowed to spend rent savings, homeownership is the clear winner in the wealth accumulation horserace.

Finally, in the same current research, Beracha and Johnson find that allowing for property appreciation rates to increase as much as 20% over their actual historic values results in virtually no change in the outcomes concerning wealth accumulation. That is, property appreciation contributes only marginally to wealth accumulation.

Implications

Without proof many have speculated about this outcome for years. However, there is now actual quantifiable evidence that homeownership is not the great levered equity creator that it has so often been touted to be. Instead, it appears that homeownership creates extra wealth mainly through its ability to force owners to save rather than through property appreciation. Thus, homeownership appears to be a self-imposed saving, which through time leads to greater wealth accumulation as compared to comparable renters. In short, buying a home makes Americans save.

Who says that Americans are horrible savers? Apparently, we are not. We have simply been saving through our homes rather than putting our savings in the bank.

ENDNOTES


[i] Homeownership is the most viable path to wealth creation for the majority of Americans. See Engelhardt (1994), Haurin, Hendershott and Wachter (1996), and Rohe, Van Zandt and McCarhty (2002), among others.
[ii] Eli Beracha and Ken H. Johnson, 2012, Beer and Cookies Impact on Homeowners’ Wealth Accumulation, ongoing research.
[iii] The research assumes 8-year holding periods. When the holding period is allowed to vary between four and twelve years, the results change only marginally. Thus, holding period has very little to do with the results.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author..

The Evidence is in on the Choice of a Lockbox

Does the choice of a lockbox matter? Do the older type lockbox systems influence the final transaction price or the marketing time of property? These questions are often pondered by real estate professionals. Older key and combination systems are low tech, easy to employ, and less costly to the broker. Newer electronic lockboxes are often more complicated, provide additional information by way of technology, and are slightly more expensive than their low tech counterparts. The trade-off is therefore between ease of use, information, and cost of operation.

If the different lockbox systems do not influence transaction outcomes (price and marketing time), then the choice of the lockbox system can be left up to the broker without costs to the sellers of property. On the other hand, if one system produces either a pricing discount or extended marketing times, then brokers need to be aware of these differences in order to better serve their clients.

Recent research by Benefield and Morgan answer these questions.[i]. The researchers directly test for the impact of lockbox type (newer electronic versus older systems) on property price and property marketing time. After controlling for other difference in listings such as location, age, size, seller motivation, and quality, Benefield and Morgan find that older lockbox systems, on average, do not influence the time it takes to market property. Property pricing, however, is another matter. Specifically, Benefield and Morgan find a negative impact on price from the use of the older lockbox system. More to the point, older lockbox systems appear to not influence marketing time but result in lower selling prices. The pricing discount was a staggering seven percent on average.[ii].

IMPLICATIONS
There is now statistical evidence (not just professional speculation) that indicates the inferiority of the older lockbox systems. Therefore, wherever financially practical, brokers should stop their use of older key and combination lockbox systems in favor of the newer electronic systems. It now appears that these newer electronic lockboxes lead to a better sharing of information and feedback between listing and showing brokers resulting in better prices.

ENDNOTES:


[i]. Benefield, J. D. and J. M. Morgan, Ease-of-Access, Home Prices, and Marketing Times: The Choice of Lockbox Type, Forthcoming in the Journal of Housing Research.

[ii]. The authors believe that at least part of this discount is related to the type (mostly lower priced, lower demand) properties on which the older systems are employed.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

A Simple Measure of Market Liquidity is a Better Indicator of Market Health than Pricing

What is the definition of a healthy housing market? Is it a housing market in which home prices are decreasing? Few would agree with this. Is it a market in which home prices are increasing? At first glance, many would agree with this definition. However, increasing prices cannot be used to diagnose a healthy housing market. If increasing prices indicate market health, then in 2005 housing markets were “very” healthy, and we know that this is not true.

If pricing does not indicate market health, then what does? The answer is simple, it is market liquidity and not pricing that indicates the health of a housing market. Liquidity has been defined in many ways but it basically boils down to: can an individual seller, at a time of their choosing, successfully market their property at or near market value? We often hear of rates (turn-over and absorption) that are related to this concept. Unfortunately, these measures are difficult to estimate and they all have something to do with outstanding inventory. What really matters, regardless of outstanding inventory, is the likelihood that a property will close. This is the most basic meaning of market liquidity and it can easily be proxied.

All of the data necessary to proxy a particular market’s liquidity (and thereby its health) is available on the daily “hot sheets” of almost every MLS in the country. Since liquidity is really just a batting average, all that needs to be done is total the successful transactions (closed properties) and divide these by the failed listing transactions (Expireds + Withdrawns + Cease Efforts + Cancelled)[i] [ii]. The resulting number is a very close approximate to the probability that any given property listed in that market will close and an increasing trend in this number indicates improving market health.

CONCLUSION

Pricing trends do not indicate the health of a housing market. Keep in mind. For almost every sell in an increasing market, there is a repurchase at a higher price. For almost every sell in a decreasing market, there is a repurchase at a lower price. Thus, pricing is a “double edged sword”. Gains/Losses on a sell are almost always accompanied by higher/lower repurchases. Thus, pricing trends can never indicate the health of a particular real estate market. Instead, it is market liquidly, which can be easily proxied, that actually indicates market health. After all, the real goal is for a seller of property to be able to transact at or near market value with a high degree of certainty. Fortunately, most MLS’s around the country have the information at their fingertips to estimate the health of their particular market.

It is liquidity (not price) that matters.

ENDNOTES


[i]. Different MLS’s have similar but not exact designations for these various categories. The goal is simply to divide successes by failures.
[ii]. The timing of the calculation will depend on the number of outcomes each day on a particular market’s MLS hot sheet. The goal is to avoid a mathematically undefined estimate. Thus, larger markets might do this average daily, while smaller markets might only calculate this average on a monthly basis. If interested, any MLS needing assistance in setting up this estimate may contact me.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author..

The Costs of Flood Zone Uncertainty

The cost, in terms of final transaction price, of being in a flood zone is established. Specifically, it appears that being in a flood zone reduces the final transaction price of a property between 4.1% and 4.3% on average [i], [ii]. These estimates assume flood zone status is clearly denoted in the MLS. However, what happens when the flood zone status of a property is unclear during the marketing process of a property, which is very often the case as flood zone mapping, is notoriously inaccurate? Are there any indirect costs such as a lower likelihood that the property will close? Concurrently, does flood zone uncertainty create a lower probability of a broker earning a commission?

This question is answered in Chang, Dandapani, and Johnson (2010)[iii]. In this study, the authors investigate for a lower chance of a closing due to uncertainty over a listing being located in the 100-year flood zone. In this particular study, properties in the MLS where listed as either: (a) property is definitely in the 100-year flood zone, (b) property is definitely not in the 100-year flood zone or (c) it is uncertain if the listed property is in the 100-year flood zone.

The study finds that properties listed as uncertain if they are in the 100-year flood zone are, on average, marketed 1.22 times before a closing actually occurs. Thus, uncertainty over flood zone status in the MLS leads to a 22% greater likelihood that the seller will not close their property during a given typical listing period. This, of course, directly translates into a 22% greater chance that the listing broker will not earn a commission or, in the case of a relisting, the listing broker will have to work 22% more to earn the same commission.

Implications

In general, the results from Chang, Dandapani, and Johnson (2010) indicate that ambiguity in information entered into an MLS is not harmless. Thus, great care needs to be taken over the accuracy of MLS data entry. Basically, uncertainty is costly to both the listing broker and the seller of property. In particular, the results strongly suggest the need for an updating of the flood maps currently employed to determine flood zone status as clearer and more easy-to-understand maps expedite the selling process, thereby reducing the costs to sellers and brokers alike.

ENDNOTES


[i]. Harrison, D.M., G.T. Smersh, and A.L. Schwartz, Environmental Determinants of Housing Prices: The Impact of Flood Zone Status, Journal of Real Estate Research, 2001, 21, 3-20.

[ii]. Guttery, R.S., S.L. Poe, and C.F. Sirmans, An Empirical Investigations of Federal Wetlands Regulation and Flood Delineation: Implications for Residential Property Owners, Journal of Real Estate Research, 2004, 26, 299-315.

[iii]. Chang, C.H., D. Dandapani, and K.H. Johnson, Flood Zone Uncertainty and the Likelihood of Marketing Success, Journal of Housing Research, 2010, 19:2, 171 – 184.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

Do Subprime Mortgage Concentrations in a Neighborhood Lead to Other Foreclosures?

Does the presence of a cluster of subprime mortgages in a neighborhood lead to a greater likelihood of foreclosure in that neighborhood among other non-subprime borrowers? This question must be on the minds of many. If you live in a neighborhood with a significant number of subprime loans, you are most certainly wondering if the presence of these loans will increase the likelihood that your property will be foreclosed upon. If you are a lender with a portfolio of loans that are in close proximity to subprime borrowers, you are most probably speculating on their impact on the chance that their presence will lead to foreclosures on your loans. If you are a politician and you supported the expansion of credit to less than perfectly qualified borrower in the interest of expanding home ownership, you are most certainly interested in the answer to this question.

The worry is that too many foreclosures caused by the presence of subprime borrowers will lead to lower neighborhood prices resulting in otherwise healthy loans going “under water” and resulting in their eventual foreclosure. This seems like such a critical question. You have to wonder why no one has attempted to answer it. Well someone has but few know about it.

Specifically, Agarwal et al [i], in a forthcoming paper in Real Estate Economics, address this very question. In fact, they find that the presence of a cluster of subprime loans does not increase the chance that other neighborhood properties will fall into foreclosure. They do, however, find that the local presence of a cluster of the most aggressive hybrid ARM products and low/no-doc loans (a subclass of subprime loans) does increase the likelihood that other nearby properties will fall into foreclosure.

Implications

The mere presence of nearby subprime loans does not in itself appear to impact the chance of foreclosure. However, a clustering of interest-only ARMs and low/no-doc loans does increase everyone’s chances of falling into foreclosure. This is most likely occurring because prices in these latter neighborhoods are not holding up in the face of nearby foreclosures. So, the results appear to be mixed. While most can breathe a sigh of relief, those that: (a) live in neighborhoods heavily populated with hybrid ARMs and low/no-doc loans, (b) hold loans in these same neighborhoods, and (c) politicians that supported the availability of these wildly unconventional loans have to worry about the fallout. Clearly, the first two groups face the potential of future financial loss; however, it remains unclear how politicians who supported “a house for everyone” will have to ante up.

ENDNOTE


[i] Agarwal, S., B.W. Ambrose, S. Chomsisengphet, and Anthony B. Sanders. Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default? Forthcoming in Real Estate Economics.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

The Ship Appears to be Turning

On October 31, CNN Money reported: “Home prices headed for triple dip”. Reporting on information provided by Fiserv (a financial analytics company), a 3.6% fall in prices on a national basis is expected by next summer. This will result in the Case-Shiller Home Price Index falling to 35% below its peak in 2006 and marking a triple dip in U.S. housing markets. [i]

Say it ain’t so! Is housing set for a third dip in five years? This depend on factors being in place to lessen the impact from market anxiety brought on by worries over a pending wave of foreclosures and the U.S. debt crisis, which we will start to hear more about shortly.

So, what are these factors and what do they tell us? These factors are really fundamental drivers that encourage individuals to buy versus rent their personal residences. They are sometimes referred to as housing affordability measures. The price to income, mortgage payment to income, and a buy versus rent analysis for various markets provide strong evidence that factors are in place to encourage home ownership or favor renting depending on the resulting measurements. In ongoing research being performed by Beracha and Johnson, these measures are at record levels in favor of buying. [ii] In fact, the price-to-income ratios in 23 of the 50 states are at 30-year record lows. The payment-to-income ratios are at 30-year record low in all 50 states. A buy versus rent analysis performed in 23 of the nation’s largest metropolitan areas also indicates that hurdle rates (the rates at which potential buyers are indifferent between buying and renting) in all 23 cities are below 25-year average appreciation rates. All of these results strongly favor purchasing.

What about per capita income and present day prices (relative to past prices)? Presently, U.S. per capita income is on the rise again and has regained to the level of 2007 (roughly $40,000 per person), while prices of homes on the other hand rest at 2002 levels according to the Case-Shiller Home Price Index. What about mortgages rates? Presently, 30-year fixed rates are at near-record low levels.

So, let’s put this all together. Housing is presently more affordable than at any time in the last 30 years. While income is only at 2007 levels, home prices are even lower coming in at 2002 levels. All of these factors set the stage for many individuals to favor purchasing over renting. Thus, while there are grave concerns over the overall health of the economy, fundamental drivers now appear in place to staunch any further significant plunges in home prices.

The ship appears to be turning. [iii]

ENDNOTES


[i] See http://money.cnn.com/2011/10/31/real_estate/home_prices/

[ii] Beracha and Johnson (2011) –  ongoing research.

[iii] This conclusion obviously assumes nothing unprecedented and catastrophic occurs such as the removal of the home interest deduction to combat the national debt or the often predicted foreclosure tsunami actually finally occurs.  While the likelihood of both is worth mentioning, neither is very likely.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

Foreclosures into Rentals

On August 10th, The New York Times reported: “Uncle Sam wants you — to rent a house from Uncle Sam”. The gist of the story is that the Obama administration is seeking ideas on how to convert the federal government’s inventory of foreclosed properties into rental properties that can be managed by private enterprises or sold in bulk. The goal here is to stabilize housing markets around the country that are suffering through a wave of foreclosures. Today, rumors of turning foreclosures into rentals surfaced again. Is this a good idea? If so, how should such a program be organized and managed? What are some of the potential downfalls of such a program?

To begin with, this is, in general, a good idea for a number of reasons. First, vacant non-performing assets (empty properties) will begin to provide returns and thus mitigate total eventual losses to lenders and thereby lower the tab to all. Second, the program should slow down the flood of foreclosed properties and should help stabilize pricing as traditional home sellers will now have fewer foreclosures to compete against. Third, the program would allow lenders (Fannie, Freddie, and others – perhaps the original lender) to time the selling of foreclosed properties, which would assist in stabilizing the housing markets around the country.

If turning foreclosures into rental happens, what should not be done? Renting to the previous owners should not be allowed as this would create significant conflicts of interest, which could easily lead to a deluge of lawsuits resulting in the failure of the program. Additionally, social engineering should not be allowed. Let the marketplace decide rent levels.

Where might problems arise from turning foreclosures into rentals? Though they are very similar, foreclosure laws vary by state. One general commonality among the various laws is that the lender must mitigate the loss to the previous owner through a timely resale of the property. These laws can be thought of as the Milton Drysdale deterrent. It is simply not in the best interest of society to allow lenders to foreclose on property, ride out the tough times, and then resell at a huge profit. However, these laws never contemplated a situation where foreclosures would be as rampant as they are at present. Regardless, if the federal government, through Fannie, Freddie, joint ventures with outside investors with Fannie and Freddie, or even the original lenders themselves, becomes a landlord looking for a better environment in which to sell, the likelihood of lawsuits over violations of state foreclosure laws is almost certain. That is to say, we will probably have “Robo-signing II”. Thus, the big question is will Congress be willing to back turning foreclosures into rentals with a federal law that overrides state foreclosure statutes.

Four years ago, I told a graduate audience that banks should get ready to manage properties in order to mitigate losses from the coming real estate crisis. However, state laws would probably prevent this and that federal legislation was needed to allow for lenders to manage and/or re-sell property in a way that balanced market stabilization with mitigating losses to the original owners. Is turning foreclosures into rentals a good idea? Yes, the idea is sound. The only surprise is that it took this long to get around to considering this eventuality.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.