Morgan Stanley analysts outline plan for housing

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America’s real estate market could be on an “unsustainable path,” faced with an oversupply of homes inaccessible to either renters or buyers. That’s what three Morgan Stanley analysts argue in a recent paper that outlines steps that can be taken to fix the sputtering housing market.

Mortgage credit remains tight, making home buying difficult. At the same time rents are rising quickly, pricing folks out of the market just as tens of thousands of borrowers are losing their homes to foreclosure every month.

The result of these twin occurrences could be “an oversupply of homes with nobody to purchase them,” a situation that is already starting to emerge, according to the research paper by the Morgan Stanley analysts, Oliver Chang, Vishwanath Tirupattur and James Egan. The three experts argue that tackling the backlog of so-called distressed properties is crucial.

A cornerstone of their plan is helping investors who would rent out those properties. They argue that in exchange for various incentives and access to the huge glut of foreclosed homes on the balance sheets of major financial institutions, investors must agree to upgrade those homes and offer flexible terms to renters, including lease-to-own programs. They also argue that tax incentives could be used to subsidize rents for lower-income renters.

On Wednesday, the Obama administration announced that it was seeking such ideas from investors for possible ways of managing the large number of foreclosed properties that are on the books of mortgage titans Fannie Mae and Freddie Mac. Selling foreclosed homes in bulk to investors who would then rent them out was one idea that the administration floated –- which is also part of the proposal by Morgan Stanley analysts.

The main hurdle confronting all of these ideas: the acceptance that American homeownership will probably decline.

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-- Alejandro Lazo

Twitter: @AlejandroLazo