The Opportunity A well-crafted rescue program could save US homeowners $2 trillion dollars over a decade. This proposed program averts a growing housing crisis, creates 300,000 good jobs that last a decade, generates an additional $200 billion in property taxes, and more. Best of all, it costs government nothing.
The Specifics Because of the economic downturn homeowners are deferring home maintenance. Thus an increasing number of dwellings will fall prematurely into the dilapidation/dereliction/demolition cycle. Foreclosed homes also can fall into this cycle. In Detroit, for example, 60,000 homes now lie derelict. Detroit’s Mayor Dave Bing now has the “Residential Demolition Program” to demolish 3,000 homes per year.
Analysis of US Census data suggests that US housing has an average lifespan of 72 years. Premature loss of housing is a blow to America’s balance sheet. The total value of the US housing stock is $16.6 trillion. The usual annual housing loss is $60 billion. This additional accelerated loss could swell from $30 billion in 2011 to a peak of $140 billion in 2015 and decline gradually across the five following years. This represents a staggering potential total loss of $1.2 trillion of assets in one decade, impacting 15% of the total US housing stock. But the true loss is closer to $2 trillion, as explained below.
Fortunately, this is a crisis only if it is ignored. This represents an ideal opportunity to rescue dwellings, create jobs, and stimulate the economy. This crisis can be largely averted if the Federal government or state governments act soon. An effective federal remedy might take a total outlay of $23 billion total across ten years. This would rescue 20 million dwellings. Outlays, however, would be entirely recovered from beneficiaries of the program—the property owners. Government benefits because houses remain on the tax roles, producing $200 billion taxes across 20 years.
Why Houses Fail Perhaps the largest single cause of failure is water damage resulting from leaking roofs. Water damages ceilings, walls and floors as well as dwelling contents. Repairs can cost tens of thousands of dollars. In perhaps a third of all instances this damage is so great that the dwelling is abandoned and later demolished.
How Many Houses Affected The National Association of Realtors reports the total number of US dwelling units in 2010 was 131 million. While there are no ready figures, analysis of Census data suggests that 800,000 dwellings are demolished each year. This, by itself, represents a terrible drain on the US economy and should be addressed. Because dwellings typically go through dilapidation before failure the true value of the loss is depressed, partly hiding the true scale of loss to the nation. If the dwellings were not dilapidated, this loss might total $100 billion annually (800,000 units times $125,000 each). The value of the annual loss including the dilapidation is estimated at $60 billion ($75,000 per dwelling, 60% of the average US price $126,000, times 800,000.). Thus the true annual loss may exceed 0.71% of the US gross domestic product ($14.1 trillion for 2009). Here can be seen also that the total potential rescue could amount to $2 trillion. Note that commercial properties are also subject to dilapidation and failure at similar or greater rates and the total value of the US commercial properties is $5.3 trillion, according to the Fed.
Evidence Perhaps readers themselves notice more houses lacking paint or looking unkempt. Analysis of US Bureau of Labor Statistics data for the past decade (1999 to May 2009, the latest available data) shows that the number of roofers deployed per roof declined to 75% of 1999 levels. Quantities of roofing materials sold has declined similarly. Note these figures are two years old, from the trailing edge of the stimulus package which kept many roofers employed. Numbers probably have declined significantly since. This also matches the on-the-ground anecdotal reports of home contractors struggling to stay in business with a tiny fraction of the business volumes of a decade ago.
The Looming Crisis: Deferred maintenance could result in a swell in housing failures peaking at perhaps triple the current rate by 2015. The first signs of this are showing up nationwide. This represents the loss of 16,000,000 dwelling units over a decade, 12.2% of the nation’s total housing. These losses could be even larger if nation’s economy takes more than five years to fully recover.
Averting the Crisis: Fortunately, it is easy and cost-effective to prevent this slow-motion calamity. Fix the roofs. Here a governmental approach has advantages over a free-market approach. Many homeowners simply can’t pay for repairs now. What is needed nationally is a 20-member crew for each population unit of 30,000 (13,000 dwelling units). This would be 10,000 crews nationwide. These crews would identify at-risk dwellings, replace the roofing, repair gutters, paint the exterior, and repair windows and doors as appropriate. They could use 50-year recycled roofing materials, 15-year rated paints, and install materials to specification so owners enjoy a transferable warranty. One crew might do 200 dwelling units annually, an average of one unit per working day. This amounts to the rescue of 2 million dwellings annually—extending their lifespan by 20 years or more on average. The average cost per unit, though use of dedicated crews, quality equipment, centralized purchasing, and rigorous quality assurance, could be $5,700. Recall that one roof job out of three requires the roof plate be removed in addition to the old roofing.
The Economics Initial funding of $22 billion across 10 years would launch the program. If crews were paid on average $19.81 per hour for 9 months work per year (the average pay in the industry) this amounts to $7 billion per year nationwide. Materials might cost $4 billion annually. Finally, administrative overhead, materials, and depreciation on equipment might contribute an additional $1 billion annually to program expenses. A collection effort would recoup costs and keep government outlays to the $22 billion total. Costs could be largely recovered through several possible mechanisms: a lien that would be paid off at the time of sale of the property, through withholding of state income tax refunds, through additional property taxes, or other such mechanisms. The $22 billion to rescue $2 trillion of assets represents an initial leverage of 91-to-1. But when including the good likelihood of repayment, the leverages are far greater. If a modest profit margin is included the program breaks even. In this case the benefits to the nation come without any cost at all. Note the funding for wages, equipment, and materials would be spent in the US. This produces yet further financial leverage of perhaps three-to-one, since the money circulates through the economy. The program, as outlined, would directly create 200,000 jobs and would create another hundred thousand jobs manufacturing materials and equipment, delivering materials, in government and in retail. The increased availability of housing means brings stability for the economy and less inflationary pressure in housing prices and rentals.
This is a rescue package that creates good jobs and makes good economic sense.