A Bailout Alternative: Section 8

Adapting the Section 8 housing subsidy model, government might have the answer we are looking for that will abate the cascading housing crisis. At the root of most of our economy’s problems, especially the contraction in our credit markets and financial institutions, are falling home prices nationwide; a phenomenon never before seen in America. Much of this turmoil was caused by misaligned incentives; however, we can use these same lessons to implement innovative solutions which capitalize on our fundamental economic motivation: financial independence.

A program which expands rental subsidies to homes sold that are in danger of (or already through the process of) foreclosure would do two important things to help abate the current crisis: (1) guarantee real estate investors a baseline rental income –effectively allowing them to accurately value a property based on cashflows which are backed by the government– and (2) help individuals in danger of foreclosure by providing them a way to stay in their homes, even though they will no longer own them.

A subsidy plan could also be used to incentivise investors and financially troubled home owners to take actions which might aid our troubled economy in other areas…and god knows, most of us could use the help. By adding certain restrictions and requirements that are consistent with maintaining an investors ability to accurately forecast cash flows, the government could also diminish the sense that this is a public hand out.

Who wins?

• Financially distressed owners get lower cost housing.
• Investors get new opportunities.
• Banks & the government get to repair their balance sheets.
• Small businesses get healthier communities and increased credit.
• Everybody gets a stronger economy.

Government involvement is sometimes required, but aligned incentives should always be attached to any subsidies. This should not be confused with the marketing benefit your banker tries to gain from giving you a toaster or the impression your real estate agent makes by giving you free window shades. Done properly, a government program can make a real & tangible difference; spurring economic growth and activity when uncertainty overwhelms.

UPDATE [12.15.08]
Robert Maniscalco, my real estate law professor, brought up an interesting point today in class. Years ago, income producing property was depreciated over a twenty year life, rather than the current 39
year schedule. What a great compliment this would be to an expansion of the Section 8 rental subsidy program discussed above. It would effectively result in a doubling of the depreciation write off (increasing investment returns) and a decrease in basis (reducing the incentive to sell). Rather than throw money at insolvent lending institutions, ideas like this would do much more to help the housing market find a bottom and save the U.S. tax payer a few bucks.

Last Updated: 04/02/2010