John Burns: GSE Renting Options Will Increase Demand and Limit Supply

The government should create an apartment real estate investment trust (REIT) to rent out foreclosed properties — a method that would avoid flooding the housing market with foreclosed properties, a real estate consultant said as President Obama’s “Future of Housing Finance Conference” kicked off Tuesday. John Burns, CEO of John Burns Real Estate Consulting, said the government-created REIT would be self-sustaining via rental fees. The government-sponsored enterprises, Fannie Mae and Freddie Mac, would hire outside property-management firms to manage the rental properties, Burns said. “I am sure this will create some controversy, particularly among extremists,” Burns said. “I am staying out of the politics and making recommendations that I believe are sound business advice.” According to the consulting firm’s survey of homebuilders across the country, new home prices dropped 3% after the homebuyer tax-credit deadline to sign contracts, with price declines in nine out of 10 regions. The firm’s research also said since the expiration of the tax-credit, homebuyer activity has diminished over 30% creating an excess of supply with no counterbalancing demand. Burns said it will take one year to sell all the homes that are currently on the market. “The rental income will be self-sustaining and the properties will be financeable in public markets, just like publicly traded REITs are financeable,” he said. Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) real estate owned (REO) properties currently account for 42% of the REO market, or 562,000 of 5.1m foreclosed properties nationwide. Burns said the best way to rent out these homes is by contracting with an outside firm to manage local property firms. He also suggests that banks, which currently own 22% of REOs, should be allowed to contribute properties to the apartment REIT. Burns’ second recommendation to stimulate demand for housing and restrict supply on non-GSE distressed sales is to make guaranteed loans to landlords who promise to rent out properties for an extended period of time. “The GSEs should make a tidy profit on these loans, while also helping provide affordable rental housing to those who need it,” Burns said. His final suggestion is to keep the underwriting requirements standard and constant. “Stop changing the underwriting rules so everyone knows what is required, and keep the fantastic financing environment,” Burns said. “Once the economy turns around, real buyers will return to the market.” Burns’ position is unwavering when it comes to GSE reform. He believes that the government should rhetorically turn back time and restore GSEs to their primary function and stance among the economy as they were in 1967, the last year before Fannie Mae was a publicly traded corporation, and 1998, which was the last year before elected officials mandated that Fannie and Freddie grow homeownership by making more aggressive loans to low income households. John Burns Real Estate Consulting is an analytics and housing research firm that specializes in real estate advice and consulting. Write to Christine Ricciardi. The author holds no relevant investments.