Motivated first-time homebuyer: the city of Los Angeles

In the rush to a bailout deal, this piece of news fell through the cracks last week, but is worth revisiting:

California and many of its communities hardest hit by the foreclosure crisis stand to receive more than $500 million in federal aid over the next 18 months to buy and fix up distressed homes, the Department of Housing and Urban Development announced Friday.

More, from the Los Angeles Times:

The city of Los Angeles is to receive about $33 million directly from the federal government. In the next few months, the city could also get money from the state, which has a pool of $145 million to allocate to communities. With more than 13,000 foreclosed homes in the city, Los Angeles Councilman Ed Reyes warned that the federal funds would go quickly. Los Angeles County is to receive $17 million, and other cities in the county, such as Long Beach and Lancaster, also would get awards.

In Los Angeles, it's not clear whether this gift from the federal government -- from taxpayers, really -- will be worth the trouble. Foreclosed houses are already selling to private buyers, and they are selling quickly -- roughly 100 foreclosed houses are sold every business day in Los Angeles County. Foreclosures account for 1 of every 3 homes sold in L.A. County.

At prevailing prices -- roughly $200,000 to $300,000 for foreclosed homes -- the $33 million in federal funds would buy roughly 130 houses -- the same number of homes that private buyers snap up in a day or two across the county. But the city will have to go to some lengths to buy the homes, or at least it should. It will need to establish a procedure that safeguards against favoritism in picking which houses to buy, and guarantees the city pays no more -- or less -- than market price. The city will also have to come up with a plan to seek bids, hire contractors and renovate and those homes, then maintain them while it lists them for sale and sells them. It will be selling into a market dominated by falling prices, which means the city could well lose money on homes the private sector would have happily bought.

What's the point, then, of the city buying the foreclosed houses? Great question.

-- Peter Viles

Your thoughts? Comments?

Photo Credit: Getty Images

Comments

[Nick]

They could cut out the middle man and just write checks to all the financial institutions which gave out reckless loans in the last few years. Same net effect, saves on overhead costs, and unlike the federal bailout bill which does basically the same thing at a much larger scale, this one has already been passed by the crooks in Washington.

[Rational Renter]

Peter, you do a good job of pointing out the problems with this unnecessary "aid." The forces of a free (REGULATED) market are amazingly strong, and we should let them act to clean up this mess.

[orcadrvr]

There is no point. It is another idiotic counter productive waste of money, just like the idiotic counter productive programs that got us into this mess.

In short, it is just another government program.

[sfvrealestate]

Whoa. Here's an example of why the muni/state government should step in now.

Let's say there's a house next to your grandmother's house. It gets foreclosed. It needs work. It sits. And sits. Squatters move in.

Imagine this happens to two or three more homes on the block at roughly the same time. Nobody is going to buy these squats, no matter WHAT the price is.

Grandma, who maintains her home very well, is now living in a degraded, unsafe neighborhood and watching her equity dribble away. She had planned to sell for a profit to fund her retirement. Now she's stuck. So bring in the government to turn this around now and save Grandma!

Also, once a neighborhood becomes significantly blighted, it usually stays blighted -- unless, of course, some government agency comes along with lots of redevelopment funds or tax incentives to developers. That's way more expensive than what's proposed here. An ounce of prevention is really worth a pound of cure...

[smrr]

Grandma should sell.

Now.

[RichW]

"Nobody is going to buy these squats, no matter WHAT the price is."

Absolutely false, not to mention absurd.

We all know that a home will move when priced appropriately. Even in Detroit there have been some gutted/trashed homes which sold for $1.00 - $5.00. Here in L.A. you could easily get many times that amount for a dump in Compton. I'm sure someone would pay at least $500-$1000 for one.

[Anonymous]

I think you have to tell grandma, "As I'm sure your daddy told you a long time ago, you're not promised tomorrow. This didn't work out. We have to move."

Seriously, compassion is the most idiotic way to run a government. Life is tough. We can't make everybody's life just what they want it to be. Sure, we can try to alleviate market failure, try to use policies that require the least dislocation and try to strive for equality, but please, stop with the pity party.

[Chris]

This is a great plan! I am a contractor with a brother in law on the City Council. I'll have my cousin buy distressed mortgages for pennies on the dollar. He will sell them to the city for a serious profit. Then the city will pay me 300K to do 10K worth of improvements! Multiply that times a few hundred houses! I'll then fund the incumbents on the council in their next election! We all win! It creates jobs, it creates great neighborhoods, it creates stability. Now get back to work so you can pay for my son's new boat!

[Valley Observer]

'I think you have to tell grandma, "As I'm sure your daddy told you a long time ago, you're not promised tomorrow. This didn't work out. We have to move."'

Zoning, police, and other services from the awful government are intended to protect against that very outcome. If grandma bought the house to live in rather than simiply as an investment, she deserves some protection. Why doesn't the police department get rid of the squatters?

[sfvrealestate]

Oh, you Darwinians! By the way, I notice that nobody could address the issue of ongoing, long-time blight that costs even more tax dollars to cure than what's being proposed here.

And by the way, if Grandma is out of money, when she moves, it will be IN WITH YOU.

[peteviles]

sfvrealestate wrote in with the example of a blighted street where foreclosures are driving down property values.

Thanks, sfv, as always. Those blighted houses will sell at the right price. I see really ugly foreclosures in Los Angeles listed for $200K; if they aren't selling, they aren't worth $200K. Maybe they're worth $115K. Whatever.

But the fact that they are overpriced and not selling doesn't justify the government running in and overpaying for them.

[Nick]

"Let's say there's a house next to your grandmother's house. It gets foreclosed. It needs work. It sits. And sits. Squatters move in.

Imagine this happens to two or three more homes on the block at roughly the same time. Nobody is going to buy these squats, no matter WHAT the price is."

Not only is that absurd (as was mentioned), but it does raise an excellent point of what the government could/should do to actually help the situation. Nobody wants vacant homes to fall into a state of disrepair; it's in everyone's interests that someone buy and occupy the first property before it becomes so.

So, what the government (local and state) should do is ensure that doesn't happen by monitoring the vacant properties and assessing severe fines if they fall into disrepair. Nothing motivates a seller to get realistic about pricing like a few thousand dollars a day outflow for security, maintenance, grounds keeping, etc.

Oh, and it has some advantages over your plan. For example, it creates more jobs for local people (to do the work to upkeep the property while it's for sale). Plus, unlike the ridiculous assertions about the government and their payoff programs, it might actually be net positive monetarily for the local government. Plus, it doesn't put money in the pockets of the irresponsible buyers and sellers while fueled the housing bubble. Plus, it makes housing more affordable for everyone. Plus, it avoids most of the inevitable corruption and favoritism that the "buying" plan would have. Plus, you could actually have a significant effect, instead of buying one house in every ten square miles and accomplishing nothing.

Really, I think given the options, my plan probably makes more sense for grandma, if not the market in general. It's a shame politicians often don't (or can't) think before they act, or we might have more good plans which actually have benefits, and not total wastes of money like this one.

[Octogenarian]

And, if the government does buy Grandma's house, how is that going to keep the house from falling into disrepair and filling with squatters? You realize that the government isn't actually moving into the house, right? If no one lives there, there's no one to keep it maintained. There would be no real difference between it being owned by a bank, or owned by the government.

[RB]

if you look at the latest Community Stabilization Home Loan Program list it appears that our tax dollars are hard at work. generally it only has a couple of sales, but this one has about 40%-50% sales pending. I'd say the government is already buying up that excess inventory....

http://www.calhfa.ca.gov/homeownership/programs/cshlp_properties.pdf

[Todd in WeHo]

First, to answer Peter's question of "what's the point?" - there is no point. Next, to SFV's ludicrous comment about grandma having planned to sell her home for a profit to fund her retirement. If grandma is dumb enough to put all her eggs in one basket she needs to be willing to pay the price if the basket breaks. As for any long term blight, if it's an attractive location my fellow gays and I will soon swarm in, gentrify the area, and turn it into the next West Hollywood. Problem solved.

[The Original RZ]

There is one point. It'll provide Mayor Tony with additional photo ops and the ability to say that he's doing something as mayor.

[the problemwithcaring]

Svrealestate -

Your hypothetical is compelling - my grandma! - but I am a confused, as to what exactly is the real benefit would be.

In your example, is the government buying the three houses that blighted grandma's neighborhood? Or would the Gov. just buy her house outright? Also would the foreclosure rescue be reserved for nice "salvageable" pocket neighborhoods located in existing blighted areas (like Highland Park), or just areas that may not be totally blighted now, but we fear may become really blighted without government intervention?

It seems like taxpayers would be leaving ourselves open to the subjectivity of lots of different actors to, when what we really need is a bottom in housing prices.

Thanks.

[kosher krab]

Since no one asked, here's what should be done with our Federal "winnings"

1. buy one really swank new Mayoral Mansion
(somehow the ex got the old one), maybe in Malibu and hold all-hours celebrity y fund-raisers

2. Buy crappy foreclosures on large lots, bulldoze and make parks, maybe plant 145 million trees around

3. Use fed housing money alnd buy up houses along the 110, 101 and 405 to expand freeways. Use eminant domain along with this to stretch the dollars.

4. buy foreclosed homes, leave them alone and let them be "graffiti parks" to foster creative kiddies

5.buy and fix up foreclosed homes, adding two garages to each one so they can be rented out to five families instead of just three

6. buy the cities of Lancaster and Palmdale, use for penal colonies

7. Buy a hundred nice, airconditioned houses, staff them with crazy cat ladies and finallly make LA a no-kill shelter city

[John]

If these statistics are accurate then I have to agree that the investment of $33 million to buy up foreclosed properties that would have otherwise sold in a few days time seems foolish and a complete waste of money to me. – I also felt the same way about the “economic stimulus package.”

Did anyone here or in Washington actually believe the stimulus package would have any real effects on the economy for the long term?

Thank you for posting this – It is definitely food for thought and a clear indicator that nobody is really looking at how this money is being invested.

[First Time Homebuyers Agent]

Great news for FTHB's in Los Angeles County and San Fernando Valley. It looks like the CalHFA program is back http://www.calhfa.ca.gov/homebuyer/ which has the 95% "conventional" first mortgage program. Keep checking my First Time Home Buyer Programs in Los Angeles County page at www.jasonhector.com/fthb for a list of the programs I know about.