US Can Rent Its Way to a Housing Recovery: Peter Orszag - Bloomberg

So evenif the European banking system somehow avoids a meltdown,economic recovery in the U. No matter what the government might try to do to breakthe housing-economy cycle, the deleveraging process willstill be painful and take some time. But that's not anargument against action; just because a headache can stillhurt some even if you take aspirin doesn't mean you shouldskip the aspirin. One thing the OBAMA administration coulddo now -- probably with Republican support -- would be toattack the oversupply of housing stock by allowing a taxwrite-off for investors who buy empty properties and rentthem out. To understand why this would help, consider that theproblems in the residential real-estate sector have twodimensions. First, we have an excess supply of owner-occupied housing, which puts downward pressure on prices. Dealing with excess inventory byshifting vacant properties into the rental market wouldhelp to stabilize prices and thereby mitigate, to somedegree, the negative-equity issue -- although additionalaction would also be warranted to attack such "underwater"situations. Onaverage during the 1990s, for example, the home vacancyrate was about 1. And by thesecond quarter of this year, the vacancy rate had come downonly slightly, to about 2. With this much supplystill available, it's no wonder that prices are stilldepressed. The question is whether the government can doanything to accelerate that process, to support home pricesand, ultimately, to promote a stronger economic recovery. One way to bolster demand would be to change ourimmigration laws to make it easier for foreigners to movehere and buy homes. That might be a good idea, but it hasno chance of being enacted soon. Former Federal ReserveChairman Alan Greenspan once highlighted a different idea,focused on supply instead of demand: Get the government tobuy the excess vacant houses and destroy them. He arguedthat could be the lowest-cost approach to mitigating ahousing-driven decline -- but also noted that it would bepolitically inconceivable. Currently, people who purchase residential real estatedepreciate the value of the property for tax purposes over27. To encourage other forms of investment, policymakers have allowed businesses to immediately depreciatethe full cost of most of their investments. So Congress could give investors theincentive to buy vacant houses now by allowing them towrite off the value immediately, as long as they hold on tothe properties for some number of years and rent them out. He calculates that annual costs on real-estateinvestments would be reduced by about a third, givenreasonable assumptions about tax rates for investors andthe interest they must pay to borrow. The policy would alsomake more rental units available and lower their price,thereby encouraging more people to move out of existinghouseholds and into their own rental units. To avoid abuses, the allowance would have to applyonly to houses that have been vacant for, say, six months. By giving thededuction in full now, rather than gradually, thegovernment loses the time value of money over that period. One might think that since the government's cost isrelatively low, the benefit to investors must be low, too. To get some sense of the numbers, assume the policyinduces an extra 250,000 housing units to be purchased eachyear and rented out, in addition to 500,000 other ones thatwould be bought and rented even in the absence of theimmediate tax expensing. If the average price of thosehouses is $250,000 (roughly the national average), the 10-year cost to the government for each year the policy is inplace would be less than $50 billion. Most of that amount,though, would be recaptured in future years, because thefull deductions would already have been claimed. The costto the government in present value would thus be about $10billion for each year the policy was in place. Selling Inventory Maintaining this policy for two years would, underthese assumptions, work off half or more of the excessinventory at a present-value cost to the government of $20billion. That seems like a pretty good deal -- and at leastworth trying. To avoid letting the tax break outlive its purpose, itshould be tied to the supply of vacant Homes for Sale. Oncethat number returns to a more normal level, the write-offshould automatically end. This kind of accelerated depreciation wouldn't bringthe housing market fully back to health. But since theeconomy is stuck in a rut and homes prices are a keyreason, it is worth trying. Perhaps most importantly, inthis era of political polarization, the idea of givingreal-estate investors an immediate write-off for buying andthen renting out vacant homes should appeal to Republicans. To contact the editor responsible for this article:Mary Duenwald at mduenwald@bloomberg. Homes for Sale