Own to Rent: Yes, We Can!

It seems to work for Barack Obama, why not progressive housing policy? Just to remind everyone where we left off, we are at the beginning of a recession induced by the collapse of an $8 trillion housing bubble.

The bubble burst because high prices led to oversupply, which eventually led to downward pressure on house prices. (Economists used to understand this is the way markets work.) The immediate impact of the collapse of the bubble was on the housing sector itself, with sales down by almost 40 percent compared to 2005 peaks, and housing starts down by almost 50 percent.

The downturn in housing was a big hit to the economy, however, the cause of the recession is people can no longer borrow money against their home. For the last six years, millions of homeowners used their houses as ATM machines, withdrawing equity almost as fast as their homes went up in price. This allowed consumption to sustain a rapid growth rate even with weak job growth and stagnant real wages.

Now this process is working in reverse. With house prices falling, millions of homeowners no longer have any equity against which to borrow. This is the cause of the sharp decline in car purchases and retail sales we have seen in recent data. This is leading to a downward spiral in which lower sales lead to layoffs, which in turn force further cutbacks in consumption and sales.

This is what a recession looks like, and there is probably nothing that can be done at this point to prevent a recession, although an aggressive stimulus package can help to ameliorate the effects of the downturn. The measure going through Congress is a positive step, even if it is inadequate for the size of the downturn facing the economy.

While we can't prevent the recession, we can try to do something about the millions of people who face the loss of their home. The latest data show houses are now being foreclosed at a rate of almost 170,000 homes a month, a record high.

The government can't shield every homeowner from the collapse in house prices, but it can help out the most vulnerable among this group. The simplest way to help moderate-income homeowners facing foreclosure is to adopt an "own to rent" policy under which the rules on foreclosure would be temporarily changed to allow moderate-income homeowners the option to remain in their home as renters.

Under this own to rent plan, the judge handling a foreclosure would call in an independent appraiser, who would determine the rental value of a house in the same way an appraiser determines the sale value of a house before a bank issues a mortgage. The homeowner would then have the option to remain in the house as a tenant, paying the rent determined by the appraiser.

This policy would provide some security to millions of moderate-income homebuyers. They would have the assurance they would not be thrown out on the street by a foreclosure. More importantly, this own to rent policy would provide the mortgage holder with a very strong incentive to negotiate terms that allow the homeowner to keep ownership of their house because banks are not interested in becoming landlords.

This is a very simple policy that can be carefully targeted to help those most in need. For example, the option to rent can be limited to homebuyers who purchased a house that sold for less than median house price in an area. That way, the policy doesn't help people who bought million-dollar houses. This policy also has the benefit that it will not help speculators or those who committed fraud in getting their loans. The option to rent is of no value to these people.

In the run-up of the housing bubble, millions of moderate-income families purchased homes, following the advice of politicians, investment advisors, economists, community groups, and a lot of other people who should have known better. The poor should not again be forced to pay for the bad judgment of the policy elites. Own to rent is a very simple policy that can make a huge difference for millions of people. In the absence of a better proposal, Congress should have it at the top of its agenda.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.