A solution for surplus homes

Buy a house, get a green card? Offering permanent US residence to any immigrant willing and able to reduce the stock of unsold new homes is an idea that could gain traction if American property prices keep falling. South Africa already faces serious competition for its skills. This could make the competition hotter.

The bursting of the US real estate bubble is a leading factor in the global slump. House prices are off 26 per cent from their peak in 2006 and still falling. Surplus inventory, which economist Gary Shilling puts at a net 2.4 million units, is a big part of the problem.

Fuelled by cheap credit, the supply of homes began to exceed the number of qualified borrowers in 2005. To sell the excess, builders and mortgage originators happily roped in unqualified borrowers, knowing they could shunt the risk to others. Wall Street repackaged it into AA- and AAA-rated securities which sold like hotcakes.

Then the unqualified borrowers started defaulting. The securities derived from their mortgages turned toxic. Financial gangrene set in. The Obama administration’s latest plan to leverage up to a trillion dollars to cleanse lenders’ balance sheets may or may not stem the rot.

In a background study for a recent Wall Street Journal article, Shilling argues that if nothing is done to reduce the housing surplus, about a third of all American homeowners – 25 million — could be “underwater” by the end of next year, owing more on their bonds than their homes are worth. The other 25 million who do not own their homes outright could on average see their equity – the difference between what they still owe and their homes’ market value – halved from already low levels.

For most Americans, their homes are their principal asset. The home ownership rate is 68 per cent, compared to 50 per cent for stocks. House price deflation means consumers can borrow less for consumption and must save more for retirement. Lower consumption means more unemployment, more home foreclosures, more unsold houses.  A vicious cycle.

The way to break it, Shilling argues, is to take advantage of America’s continued ranking as the most desired destination for migrants (according to an Economist Intelligence Unit survey in which South Africa places 43rd, a couple of spots below Kazakhstan). “There is a vast market for America’s surplus houses – foreigners who are clamouring to achieve resident status in this country and would probably buy houses to reach that goal…The mere announcement of this programme would probably go a long way toward stabilizing house prices.”

Under Shilling’s plan, foreign home buyers would get temporary residence when they made their purchase and permanent status after five years if they still owned their houses, without renting them out, and had a clean criminal record.  They could get bonds for up to 80 per cent of purchase price.

Financial adviser John Mauldin – who, incidentally, was part of the investor group that met ANC President Jacob Zuma in Dallas just before the Polokwane conference in 2007 – is using his hugely popular (1 million subscribers) newsletter to promote the scheme, urging readers to contact their congressmen. He favours requiring all but the highest skilled applicants to buy homes outright (the median US house price is around R1.9 million). All told, he thinks, the result would be a $300 billion stimulus over two years.

Mauldin is getting flak from critics who see the new immigrants taking American jobs at a time of mounting unemployment. He responds that his approach would be temporary and would not entail any increase in existing immigration levels. It would simply raise the net worth of the 1 million-a-year inflow until the housing surplus is dealt with. Far more jobs stood to be lost from house price deflation than could ever be displaced by the home-buying newcomers who, in any event, would likely be net job creators.

Besides, Maudlin argues, the buy-a-home-get-a-green-card plan would attract precisely the kind of new blood – people with proven earning power – America needs to finance the retirement and medical costs of the graying Baby Boom generation.  People, on other words,  countries like SA can ill afford to lose.

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