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DC's new motto: Why buy when you can rent?

August 24, 2011: 4:39 PM ET

Selling the massive glut of homes the U.S. government now owns hasn't exactly worked out. Now Washington is exploring the idea of renting them.

HousesFORTUNE -- Owning once trumped renting, but the collapse of the U.S. housing market changed all that. Newly strapped consumers took it upon themselves to redefine the American dream, making it socially acceptable to mail in a rent check instead of a mortgage payment. Now, it seems Washington policymakers might have finally caught on.

The Obama administration is exploring several options to help stabilize the nation's troubled housing market -- including turning thousands of government-owned foreclosures into rental properties. The Federal Housing Finance Agency is seeking input from investors on how it could offer homes owned by mortgage giants Freddie Mac and Fannie Mae for rent. As of now, the details of the proposal are as unclear as its potential effects on the deeply troubled housing market.

Still, it would be a profound about-face for the U.S. government. Policies explicitly encouraging home ownership date back to the Great Depression. During the crisis of the 1930s, when half of all mortgages went into default, a series of federal measures were enacted to help troubled homeowners, laying the foundation for a government active in the housing market. Over the last half-century, Freddie and Fannie had a similar mandate, expanding homeownership but also getting caught in the 2008 crisis, ultimately requiring rescue. With a growing bailout that could ultimately cost as much as $389 billion, the administration is looking for a better way forward.

Selling the homes the government now owns sure hasn't worked out. (Freddie and Fannie still own or guarantee about half of the nation's mortgages and nearly all new mortgages.) As of the end of June, the government-owned roughly 248,000 foreclosed homes, mostly concentrated in California, Georgia, Florida and Arizona. About 70,000 are for sale. Generally, sales of homes have languished despite government subsidies and tax breaks. What's more, the so-called shadow inventory stands to depress home prices even further. There is currently about a nine-month supply of properties in the housing market. And with 4.1 million more mortgages that are at least 90 days delinquent or in foreclosure, an additional 10.5 months of supply is expected to flood into the housing market. That could send home prices even further into free fall.

That's where rentals come in. Demand for rentals has been steadily rising, making it a natural place for policymakers to look for solutions. The rental vacancy rate during the three months ending in June was 5.5%, down from its peak of 7.5% during the first three months of 2009. By contrast, vacancies in homes for sale held steady at 3.5% during the same period, even as home prices have fallen about 30% since their 2006 peak. Given the excess inventory and the steady rise in rental prices, it may be the best place for the government to start.

Bill Wheaton, a professor at the Massachusetts Institute of Technology's Center for Real Estate, argues this would take hundreds of thousands of homes for sale off the market and therefore help stabilize prices. Additionally, it would slow the rise in prices for rentals, a good thing given how financially constrained many households still are as they continue to deleverage from years of over-spending. "It could really make a difference," Wheaton says, adding that the government should sell its properties to investors and create incentives for them to rent rather than sell for a period of time.

What's more, residential construction is at record lows. And with U.S. population growth at 1% a year, it's certainly possible that a robust market for rentals could absorb much of the housing market's excess supply. "It has the potential to have a greater impact on the market than anything they're doing currently," says Chris Mayer, a real estate professor at Columbia University and a fan of the idea.

Such a plan has its fair share of potential problems though. Demand for rentals might not be enough to absorb all the excess inventory. And buying up homes in bulk might pose a logistical challenge for investors, as foreclosed properties cluster and dot across the country. The nation's biggest banks and mortgage lenders have also amassed a huge empire of homes resulting from foreclosures totaling more than 872,000 homes -- almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider.

The idea also represents one additional major shift, that Washington lawmakers finally realize a new wave of homebuyers isn't going to materialize any time soon to save the housing market. And if that's the case, renters may in fact be Washington's best hope in the short-term.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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