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February 3rd, 2009 7:46 AM by David W. Welch
I wrote the other day that the government could buy up 3 million homes for a cost of about $600 billion. Keep in mind that while that is a huge number, the first bailout plus the stimulus package plus what the Fed is doing to drive interest rates down is around $2 trillion. I am also exaggerating with suggesting that the government buy 3 million homes. There are about 3.7 million re-sales on the market which is 40% too many for there to be a balanced market. Part of this imbalance is the number of homes for sale, but equally important is the diminished demand for homes. Demand has dropped off because consumer confidence has eroded. Consumer confidence in the real estate market is down because prices have fallen so much. Part of the reason prices have fallen so much is because the banks have slashed prices on their real estate owned (REO). The banks have slashed prices because they can afford to because of the bailout.
That is sort of a simplistic run down of what has happened, but I think it explains exactly where we are today. The banks did not take the money and start loaning it. They took it to shore up their balance sheets as they began dumping REO's. The bailout did not stimulate lending it facilitated price cutting. I understand if the government buys up the foreclosures that is tantamount to price fixing. I am certainly not for price fixing. The government has tried that before, and it always blows up in their face. I do believe the more I see what is happening in the Orlando Real Estate market and the more I think about it, the bailout already "fixed" prices by giving the banks the ability to cut REO prices. If the government comes in and purchases those assets now they will be reversing the price fixing they already created.
The lower prices are benefitting buyers, but many times the buyers that are getting the deals are investors purchasing speculatively. In fact, I wrote 14 offers in January, and only two were accepted because there were frequently multiple offers on REO listings. Often they are selling for cash to investors. I propose the government buy up all the REO's up to one million homes for a cost of probably $200 billion (10% the cost of all the bailouts and stimulus packages). They can maintain and hold these properties until things stabilize, then begin selling them on the open market a year from now.
This does three things: first, it reduces the glut of homes on the market, which will help correct the over-supply of homes for sale; second, it stabilizes prices by removing the artificially low priced REO's created by the bailout; third, it supports consumer confidence in the real estate market. I believe you will actually see some sellers taking their homes off the market, and buyers will begin jumping in the market as they see fewer homes for sale. Outside of real estate, you will see consumer confidence overall grow as equity begins to return. Spending will increase, and the economy will turn.
The more I think about it...this is not so crazy.
David Welch, Orlando Real Estate