Bulk Buying Would Ease Home Crisis, Morgan Stanley Analysts Say

Encouraging investors to buy foreclosed homes in bulk would help shrink the U.S. housing surplus, stabilize property prices and provide affordable rentals, Morgan Stanley (MS) housing analysts said in a report today.

The collapse of the U.S. residential real estate market triggered the recession in 2007 and has stifled an economic recovery, according to the study. Incentives such as tax breaks and eased lending terms are needed to encourage more investors to purchase repossessed homes, repair them and rent the properties at affordable rates to people who can’t afford to buy a house, analysts led by Oliver Chang wrote.

“What’s important to do is help clear the backlog as quickly as possible with as little detriment to home prices as possible,” Chang, head of housing strategy in Morgan Stanley’s research division, said in a telephone interview. “The goal here isn’t to help investors. The goal is to provide quality, affordable housing.”

Housing prices in 20 major U.S. cities have fallen 33 percent from their July 2006 peak, according to the S&P/Case- Shiller index. More than one in four homeowners with a mortgage owe more than their property is worth, Zillow Inc. figures show.

Chang, who wrote the report with New York-based Morgan Stanley housing analysts Vishwanath Tirupattur and James Egan, predicted in March 2009 that U.S. home prices hadn’t yet reached bottom, a forecast borne out by the S&P/Case-Shiller data.

There are about 2.2 million vacant homes available for sale in the U.S., and 7.5 million homes facing foreclosure that would add to the excess housing supply, causing values to drop further, the Morgan Stanley analysts wrote.

Homeownership Rate Declines

The homeownership rate fell to 65.9 percent as of June 30, the lowest level in 13 years, from a high of 69.2 percent in June 2004, the Commerce Department reported July 29. The effective homeownership rate would drop below 60 percent if delinquent buyers who are expected to lose their houses to foreclosure are removed from the total, Chang estimated in a July 20 report.

While loan modifications and other methods to help keep current owners in their homes should remain a government priority, those programs can’t help everyone, he said.

About 2 million households are likely to receive foreclosure filings this year, according to RealtyTrac Inc., an Irvine, California-based data provider.

“Mortgage credit remains tight, making home purchases more difficult, while rental demand is accelerating, causing rents to rise quickly,” Chang and the other Morgan Stanley analysts said in today’s report. “If nothing is done soon, we will find ourselves in a situation where owner-occupied housing becomes unobtainable due to lack of credit, while rental housing becomes unobtainable due to rising costs.”

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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