How Not To Help A Housing Market

And now, the latest bad idea from the people who run Chicago: the Cook County Land Bank:

[The Land bank was] formed 18 months ago with the goal of stabilizing communities by finding new uses for more than 55,000 vacant lots and abandoned houses and other buildings within the county.

[T]he land bank will acquire through donation or purchase so-called “zombie properties,” those vacant homes that are lingering in the foreclosure process, as well as bank-owned homes. Then, a construction management firm will vet and hire contractors to complete the work necessary to make the homes move-in ready . . . .

At the same time, the land bank will work with local housing counseling agencies to identify and help pre-qualify potential buyers who will select a home, wait for it to be rehabbed, and then receive mortgage financing from [a bank] or another mortgage lender. 

Buyers will have to make a $1,500 deposit as well as a down payment equal to at least 3 percent of the home’s post-rehab value.  [Emph. added]

So to recap: a construction management firm chosen by an agency of Cook County will “vet and hire” local contractors to rehab vacant and foreclosed homes it has acquired. Then the agency will contact local housing “counseling” agencies to choose individuals who’ll be given mortgages on sweetheart terms to buy the properties, presumably at whatever price the Land Bank deems to be the property’s “post-rehab value.”

This entire process is, I repeat, being carried out by what is essentially an agency the city of   Chicago. I can’t imagine any opportunity here for graft, favoritism, or corruption, can you?

Here’s a better idea. If Chicago really were serious about supporting home values and improving neighborhoods that have been blighted by foreclosures, it should do what many other cities have done: allow private capital in and let it work its magic. In particular, the city should do what it can to encourage investors to buy the dilapidated properties, fix them up, and turn them into rentals. These sorts of investments (and on a huge scale) are one reason some of the hardest-hit housing markets around the country have recovered a lot faster than many people once expected.

But the Land Bank’s policy seems to be to actually discourage rental conversions. Rentals “are not the highest and best use” of the properties, the Land Bank’s head tells the Chicago Tribune. Really? Why not exactly? Instead, the city seems intent on pushing the same subprime homeownership policies that caused the crunch and housing collapse in the first place. What’s the definition of insanity, again?

One unhappy result of the Cook County’s government-in-control land bank scheme, I suspect, will be that the hardest-hit part of Chicago’s housing market will recover more slowly than markets in cities more welcoming to private investors. That’s been the case so far, at least. According to Case-Shiller data, home prices in Chicago didn’t bottom until March of 2012 and since then have risen by around 23%. By contrast, in Phoenix—which has been something of a rental-conversion hotbed—prices bottomed in September of 2011 (six month earlier than in Chicago) and have risen by 45%. In Miami, another rental-conversion mecca, prices are up by 37% from their lows.

People will grouse about the profits private investors stand to earn. But why? These investors have put their own capital at risk in very distressed markets. They deserve to earn a return. In the meantime, private investors have proved to be unsung heroes who’ve played a key role in bringing moribund housing markets around the country back to life. The city of Chicago ought to be welcoming them.

What do you think? Let me know!