Renting Out Government-Owned Homes is the Right Move – But Probably Wouldn’t Make Any Difference to You

The Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, is considering proposals for selling government-owned homes to investors, who would then turnaround and sell or rent them out. (The official request for policy ideas is here.) It’s hoped that this move would help government agencies earn some much-needed revenue, boost neighborhood home values by getting buyers or renters into vacant homes and ease tight rental markets by expanding the supply of rental housing.

Even though Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) are national agencies, housing markets are local, which means that the vacant, foreclosed properties they own are concentrated in regions that were hit hardest by the housing crisis. Among larger metro areas, these agencies own the most foreclosed property – known as REO (real estate owned) – in Las Vegas and Atlanta, after adjusting for metro area size. Several metros in Arizona, Michigan and California are also among the top 20 metros where the government owns a lot of homes.

NOTE: Top larger metros (100,000 housing units or more), ranked by government REO per ten-thousand housing units. Includes all homes owned by Fannie Mae, Freddie Mac and FHA that have been through the foreclosure process and are being marketed for sale, as reported by the U.S. Department of Housing and Urban Development (HUD).

Generally, places that suffered most during the housing bust from severely falling home prices and high mortgage delinquency rates now have the highest concentration of these vacant, foreclosed government-owned homes. The big exception is Florida. While the Sunshine State experienced big price declines and lots of defaults, surprisingly few of the homes lost there have made it through the foreclosure process and can be put back on the market. Why is that?  It’s because the foreclosure process in Florida takes a lot longer than in most other states. As a result, many of the Florida homes that the government and banks plan to put on the market someday are trapped in a slow limbo today.

Would selling these government homes to investors help neighborhoods? Yes. Vacant, foreclosed homes drag down the value of neighboring properties, so getting those homes occupied would help stabilize neighborhoods. A push to rent or sell these homes can and would help neighborhood home prices in areas where the government owns a lot of the homes – but such a policy wouldn’t do as much good for hard-hit Florida where the government has less REO to sell. The map shows where the government owns the most REO ready to sell (relative to total housing units) – and where getting those homes occupied could help local markets the most. The Southwest, inland California, northern Georgia and southeastern Michigan stand to gain the most from selling or renting out government REO.

But if you don’t live in a neighborhood with lots of homes that the government can sell or rent, then REO policies wouldn’t do you much good. Renting out these government-owned homes wouldn’t ease pressure on tightening urban rental markets. Renters typically live in bigger, denser cities, which are not where most of the government-owned homes are. In fact the typical location of a government-owned home is in a neighborhood with fewer renters, higher rental vacancies and where homes are more spread out. (FYI, this description is based on the housing characteristics of zip codes where these government REOs are located.) In short: you’d benefit if you live near government-owned vacant homes that get occupied, or if you’re looking to rent in neighborhoods where lots of overbuilding led to lots of foreclosures, but most people facing tight rental markets live far from these clusters of REO properties. Renting out government-owned homes wouldn’t give renters more options in most neighborhoods, which means that those same government-owned homes might have a tough time finding tenants.

And even if the government sold all its REO to investors and those investors were able to find buyers or renters immediately, it would make only a small dent in the overhang of empty homes from the housing boom. Of all the REO homes currently owned by Fannie Mae, Freddie Mac and FHA, fewer than 100,000 units are currently listed for sale. (In total, including those not yet being marketed for sale, these agencies own over 200,000 homes.) There are over 3 million total homes on the market, plus millions more of “shadow inventory” – homes in default or foreclosure that aren’t on the market but are likely to be in the future. Getting people in 100,000 government-owned homes still leaves a lot of housing supply that will take years for the market to absorb.

So is this policy a misstep? No. It would help some of the most struggling neighborhoods in the country by getting vacant homes occupied. It leaves lots of big problems unsolved, but no one housing policy will fix what ails every local housing market. And, remember, housing is local, so the housing market is not just the federal government’s problem: state and local governments need to act, too. Florida loses out on the benefits of REO sales because its foreclosure process takes so long. Cities with tight rental markets need to boost supply by undoing regulations that make construction expensive or impossible. Just because one policy wouldn’t fix everything is no reason not to do it, but we can’t stop there.