Rent, Demolish or Burn? What to do with Foreclosed Houses

Written by Gavin Kakol, GEI Associate

Five years since the start of the global recession, nearly 10 million foreclosed homes remain vacant nationwide.  The heart of the 2008 crisis (foreclosures) continues to affect neighborhoods around the country as property values stay depreciated from oversupply; meanwhile, foreclosed homes have become eye sores with accompanied neglect and vandalism, which further pushes surrounding home values down.    Numerous states have undertaken policies to reduce supply by simply demolishing entire units.  Ohio in particular has leveled nearly 6,000 foreclosed homes since 2006.  With additional funds from the national mortgage settlement, Ohio plans to demolish another 20,000 residences in the coming years.  Last month, the Federal Home Agency proposed leasing federally owned foreclosures at low rates.  Despite the multitudes of people displaced because of economic hardship, a major concern with the proposal is the adverse effect that may accompany low rental housing.

According to Case Western Reserve University NEO CANDO project, dilapidated foreclosed homes could be negatively impacting the Cleveland area by as much as 50%, which is the amount the average price of a home in Cleveland has dropped since 2005.  On that note, many residents are glad to see neighboring houses being demolished.  Cleveland resident Cedric Cowan’s response to the tear-down of a neighboring home was:

They don’t pay no rent…then the [houses] catch on fire. So I’m glad they’re demolishing this one.

According to United States Family Network (USFN), foreclosed homes bring criminal activity to an area, which in turn reduces the surrounding homes’ values.  With the influx of criminal activity and reduction in value, more homeowners attempt to leave their homes which only adds to the supply problem.

Back in February of 2012, a settlement was reached between the federal and 49 state governments (excludes Oklahoma) and some of the largest banks. Portions of the $26 billion settlement are being distributed to state governments.  Ohio plans to use $75 of its $95 million allotment to continue demolishing homes.  The allotment coupled with another $75 million that could potentially be raised from the sale of federal bonds would produce a home-reduction pot of $150 million.

Demolishing operations are far from inexpensive; since 2006 Ohio has spent over $40 million to demolish 6,000 homes.  With $150 million dollars the state can only feasibly take-down another 22,500 units, which only amounts to 20% of the total supply of foreclosed homes. 

Another question is what will become of the vacant plots of land left after the fact?    Justin B. Hollander, an assistant professor with the Department of Urban and Environmental policy at Tuft University proposes a possible green initiative in which governing entities would work to create parks and revegitation areas.  Hollander challenges congress to provide incentives for the banks to release their real estate holdings in a way that promotes green land use.

Professor Dennis Keating of Cleveland State University’s urban planning and law program said the proposal:

… would barely make a dent in what we already have in the backlog of vacant, abandoned housing. And I suspect we’ll have a lot more in the future.

Chief executive officer of BNY Mellon Investment Management, Curtis Arledge has proposed the “burn-the-houses down approach”, figuratively speaking, as a measure to reduce the supply and inject money into the macro economy.  The approach is not to be taken literally – we can’t all take to the streets with torches and begin burning down homes, but it also implies that we should not be just knocking down these homes either.

I would never say burn them down. I do think that there’s a lot of productive [assets], both materials and labor, that went into creating it…Should we consider buying houses and potentially rent them as a nation? Yes. I think we should.

The federal government owns 210,000 of the nearly 10 million vacant homes across the country as a result of owner defaults.  Back in February of 2012, the Federal Housing Finance Agency (FHFA) expressed its plans to sell 2,500 properties to investors in Atlanta, Las Vegas, Phoenix, Los Angeles, and three metropolitan locations in Florida.  The intention is for those investors to rent off the properties at low rates. Edward J. Demarco, Director of the FHFA announced:

This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace

The FHFA’s plan comes with its share of concerns.  The influx of cheap living accomodations may result in another wave of lowered home property values.  Furthering the problem, the low-cost rents may not amount to enough cash to properly maintain the properties.

Sources:

• Uncle Sam wants you to rent out its foreclosed homes (Les Christie, CNN Money, 29 February 2012)

• Demolition Funding A Comprehensive Approach to Revitalizing Communities (Robert Klein, USFN, 2012)

• To Beat the Burst, Burn Houses Down? (Tom Steinert- Threlkeld, Securities Technology Monitor, 9 July 2012)

• What To Do With Vacant Houses (Justin B. Hollander, Slate, 20 March 2012)

• Foreclosure Fraud Settlement By The Numbers (Pat Garofalo, Think Progress Economy, 9 February 2012)

• Ohio Tears Through Blighted Housing Problem (Brian Bull, NPR, 5 April 2012)

• Cleveland Council Learns Federal Funds to Demolish Vacant Homes Could Be On The Way (Joe Pagonakis, News Channel 5 ABC, 14 February 2012)

• Latest data reveals 26,000 Vacant Homes in Cuyahoga County alone (Joe Pagonakis, News Channel 5 ABC, 13 February 2012)