Foreclosure Mop Up Operation

How are we going to absorb the excess housing inventory being thrown off by foreclosures and new home construction (spec homes)? And how are we going to get American buying homes again?

Is it going to be enough just to lower interest rates? Will that get people buying homes again — enough homes to actually absorb all of the excess inventory or at least enough to reduce for sale inventory down to about a 90 day supply? I doubt it. I say it’s going to take something more and I’m proposing what it will take to get things accomplished.

The Way to Mop Up Excess Housing

Here’s  what I propose.

Let’s take two main categories – First Time Buyers and Second Home Buyers.

Why these two categories? Because they are the only ones that count in the home buying business.

New household formations by the children of baby boomers are the driving force in housing demand in the U.S. As they graduate from college, get jobs, gain earning and spending power, many can soon afford to buy a home. Especially those who marry and become two earner households.

Second home buyers are the “heavy users” of residential real estate “products.” They are like housing addicts and we need them.

What About Foreclosed Owners?

Well, what about them? I say no matter what you do to keep the foreclosed owner in their home, very few will succeed. The problem is not with any particuluar owner for any particular home. The home does not care who owns it. What the home needs is an owner who is financially able to pay the mortgage and maintain the home – and that’s what our economy and our credit markets need. If by some miracle of god or fate or government the foreclosed owner can somehow suddenly afford their home, more power to them. But they will be few and far between. Foreclosed homes owned by the others should be sold to owners who can afford them. Which brings us back to the two main categories of owners – first time buyers and second home owners.

For first time buyers who purchase a foreclosed home, I propose something along the line of a 200% interest deduction for the first three years of ownership and then a phase down to 100% interest deduction over the next 3 years. You should have to be otherwise qualified to purchase with at least a 10% down payment. If you stay in the home, stay current in your mortgage payments and real estate taxes and do so for 5 years, you may sell the home without recapture of any deductions. However, if you sell before 5 years, then your deductions would be recaptured in the year of the sale.

For anyone who already owns a home, I propose something similar for those who can afford to purchase an additional home provided it is a foreclosed home and provided they purchase in 2009, a 200% interest deduction for 3 years. Then, in addition, if the home is a rental property and the annual rental income is equal to or greater than 90% of the mortgage payments, you should be able to claim accelerated depreciation based on say 15 years instead of 29 years. The excess deduction and accelerated depreciation should be recapture if you sell the home sooner than, say, 5 years.

I have no idea what the revenue impact on the government would be from these ideas.  I suspect it would be positive or at worst neutral. But quite frankly I don’t care. Tax revneues will take care of themselves when homes are owned by those who can afford them and the economy and credit markets return to some form of sanity.

We might also consider creating a new type of investment company that receives favorable treatment for investing in large numbers of foreclosed homes, say 100 or more, provided they put occupants in the homes.

There are many ways to solve this problem, but I don’t observe much discussion of anything except interest rates and bank bailouts. What are your ideas?


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