How Renters Could Save the Housing Market

The housing market needs a lift and it could come from renters.

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It might seem counterintuitive, but increasing rental activity might be the medicine the ailing U.S. housing market needs to get back on its feet.

Virtually every corner of the industry has been languishing since the 2008 financial meltdown, and experts say even if the U.S. manages to contain the domestic impact of the ongoing financial crisis in Europe, the albatross of a weak housing market will continue to drag down the economic recovery stateside.

In short, there will be no economic recovery without a housing recovery.

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Experts say the glut of vacant homes is one culprit holding back any meaningful improvements in the housing market. While it's normal to have some vacant homes on the market, vacancy rates have skyrocketed over the past few years. Leaving out recreational and occasional-use homes, the rate stood at 7.9 percent according to 2010 Census data, significantly higher than during the bubble, says Jed Kolko, chief economist at real estate information website Trulia.

If nothing is done, the extra inventory will eventually work through the system as the economy gradually recovers and Americans' financial situations improve, he says, but could more be done to speed up the process and help the housing market?

Some cities have considered bulldozing vacant homes to address excess supply, but the political viability of such a move is questionable on a larger scale. Perhaps more realistically, others have suggested introducing financial incentives for real estate investors to encourage them to purchase vacant homes and convert them into rentals. We're seeing that to some extent now, says Patrick Newport, economist at IHS Global Insight, but not to the degree it needs to be to make a dent in the huge housing inventory.

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But if more investors could be enticed to buy, it could help dry up the excess supply that continues to depress home prices and keep homeowners underwater on their mortgages."Congress could give investors the incentive to buy vacant houses now by allowing them to write off the value immediately, as long as they hold on to the properties for some number of years and rent them out," Peter Orszag, vice chairman of global banking at Citigroup and former director of the Office of Management and Budget under President Barack Obama, wrote in a recent Bloomberg column.

While the plan sounds appealing and the cost to taxpayers is relatively small according to Orszag, the geographic and employment trends that track vacancy rates across the country pose a problem—where vacancy rates are high, unemployment also tends to be high. "It might work for vacant homes in some areas, but much of this vacant housing stock is in areas where most renters don't live," Kolko says. "And they're not in locations where there are employment opportunities."

Reducing the number of vacant home on the market could help treat another disorder afflicting the housing market. Millions of Americans have negative equity in their homes, many of them facing foreclosure and unable to refinance mortgages at lower rates to free up cash. But if a decrease in supply pushes housing prices up, over time homeowners could potentially avoid foreclosure, recoup lost equity, and refinance their mortgages at lower interest rates.

[See Could the Crisis in Europe Drag Down the U.S.?]

The good news is that the population is growing and there's a lot of pent up demand for housing. "Many young adults have been doubling up or living with parents," Kolko says. "There's also been so little new construction so there are very few brand new units." The bad news is that without intervention of some sort, the housing market is likely to continue slogging along.

"The government has tried many things and none of them did all that much good," Newport says. "It's not clear that there's that much more the government can do, but it can do something. If it could make it easier for homeowners to refinance that would be good for the housing market, too."