September 26, 2011 4:44PM

On A Rental Solution to the Foreclosure Crisis

Dealing with the large overhang of foreclosed homes has been an issue vexing both policy‐​makers and real estate professionals, especially since both continue to resist the obvious solution of letting prices fall to their market‐​clearing levels. The latest “solution” is to increase the demand for excess housing by converting said homes to rental properties.

My first reaction to the proposal was maybe, but then are not the housing markets with excess owner units the same markets with a glut of apartments? Shifting a unit wouldn’t seem to impact the overall excess supply in a given market. Given my general willingness to subject my suspicions to empirical testing, off to the Census Bureau’s Housing Vacancy Survey I did go. 

It seems my first reaction was half‐​right. If one compares owner vacancy rates with rental vacancy rates across metro areas, you do indeed find a positive correlation, but only about .5, which leaves considerable room for variation. Interestingly enough, that correlation, while still positive, becomes considerably smaller (.26) if one looks at just housing markets with above average owner vacancy rates.

The bottom line, in some markets like Portland OR or Seattle WA, the rental market is not so glutted that it could likely absorb a significant amount of vacant homes. In other markets, like Jacksonville FL, Dayton OH Phoenix, AZ or Las Vegas, NV, there is both a surplus of owner and rental properties. This implies that such homes would not be quickly rented or would have to rent at a considerable discount. Unsurprisingly these double glut markets are where the foreclosure crisis is centered.

Of course none of this changes the fact that the best way to get the housing market moving is to have the government stop meddling and allow market fundamentals to drive prices, instead of using government to pretend the bubble never ended.