Friday, August 12, 2011

Housing Fix or Folly?

You may have heard that the Obama administration has reached out to experts in the field of real estate regarding foreclosures for their opinion on reviving the market. His idea is twofold. First, bundle thousands of Fannie Mae and Freddie Mac owned properties and sell them to investors provided they agree to rent the units as opposed to selling them. The second idea is to have investors partner with Fannie and Freddie to manage the properties as rentals and share in the profits. I normally reserve my opinion on this blog, but occasionally deviate from that norm. So here goes...

Bundling the properties and selling them as a package may be the quickest way to take the pain (a/k/a ripping off the band-aid). This, I have no problem with, on a macro level.

The government is, or should be, in the business of taking care of society's basic needs and the private sector is in the business of making money which leads to innovation and prosperity. When the government dictates the use of resources, the resources are not used to their full potential, unless blind luck intervenes. The term that personifies productivity as it relates to real estate is "highest and best use."

In simple terms, sell the properties individually or by the thousands, but let the buyers dictate the use (environmental issues as the caveat). The properties will then garner the highest price which is best for taxpayers currently on the hook for the losses of these agencies. Moreover, the highest and best usage of the properties will not artificially affect the rental market. There are unintended consequences to any government intervention. (The people owning rental properties will be unduly burdened financially by this plan.)

Put another way, if I know I can generate a greater return on the purchase of a property by renovating and selling, yet the government tells me that if I buy it, I must rent it at a lower return, am I going to pay the same price as if I could sell it? Is the government going to obtain an optimal return on the debt owed by these quasi-governmental agencies? The answer is axiomatic. I welcome your comments on this important issue.

No comments: