DECONSTRUCTION: Using market forces to correct supply imbalance.

The consequences of the housing and toxic debt crises are still being felt and they reach us all. Years of cheap, easy credit enticed under-qualified borrowers and over-zealous developers to build unsustainable buildings, roads and neighborhoods all over the country (and we see now, in Greece, Spain and other places), and we have a supply and demand imbalance: too many units, too much borrowed to build them and too few people interested in borrowing again to live or work in them.

Still, mortgages can’t be re-written on upside down properties, a million or more construction workers are jobless and the rest of us wonder if our home values will ever recover. At the same time, large banks have weathered the storm at the expense of the American taxpayer: they are flush with capital, but not poised or inclined to lend because they can’t see a clear path away from high-risk collateral.

The mortgage recovery act in 2008 was proposed to stop the bleeding by restructuring mortgages to reflect realistic home values; in effect codifying all of our losses, and ensuring a long and deep downturn. So it didn’t take hold, and that’s a good thing. And the most visible provisions related to housing in the 2009 stimulus bill were energy upgrade tax credits, and first time home buyer tax credits; policies that  add to consumer debt (for qualified borrowers) and do nothing to remove excess supply, weakening the outlook for long term recovery.

It’s time to face facts. We overbuilt homes and commercial buildings for decades and unemployment has shrunk the pool of qualified buyers and interested lenders. Until units are removed from the market and real value-producing jobs are created we’ll never see a full scale, sustainable recovery.

Here is a way out. I’ll call it the deconstruction market. The objective is to free cash flows for higher value use, and to tap remaining stimulus funds to create jobs that remove excess, unused interior space from inventories that are standing idle and wasting energy and to employ people to do the vast amount of  work required for the task.

Homeowners in distant suburbs and depressed regions with upside down home values would have an option to trade up to smaller but smarter spaces closer to public infrastructure and with shorter commutes to schools and work, freeing up time and cash. The option would be available for 5 years, and stipulate a minimum 30% reduction in overall square feet, and 40% lower target operating costs with energy upgrades.

Their mortgages would be rewritten to up to 100% of the value of the new home based on current valuations and future energy upgrades, and extended to up to 50 years at a fixed low interest rate, significantly freeing up cash flows with lower debt service. They would be obliged to invest any down payment, tax credits and 50% of 10 years of future cash flow savings into the home immediately to pay for redesign and reconstruction to capture the best use of the smaller space using renewed materials and for energy efficiency upgrades like solar, insulation, on demand heat and water, radiant heating systems and windows.

The government (us) would take ownership of the vacated home temporarily. The original mortgage holder would write down the difference between the old mortgage and the new mortgage.

Unspent recovery act money would be invested to hire contractors to disassemble the vacant homes and recover the salvageable materials and made ready for resale. These materials would be put on the market to supply upgrades (consider how many modern windows could be moved from one home to another.) The land would be recovered and owned by a federal trust, which would in turn selectively lease it inexpensively to flex-farms, lease or sell it for renewable energy farms, or recover it to wetlands where water supply is at risk (and reduce redundant water infrastructure built to serve the exurbs). All proceeds from renewed materials or land leases or sales would be split equally between lenders to cover loan losses and the government to cover asset losses and program costs.

Of course there are also homes that are already near public infrastructure that can’t be traded up and are in or near default.

In this scenario, one half of the home would be refinanced if the home would be converted to a managed duplex or a townhouse. Renewed materials would be used and construction workers hired to convert the building. Similar mortgage and financing terms might apply and the homeowner would become the property manager. The vacant unit would be placed on the trade-up market and await either a tenant or a buyer.

And there are homes that were foreclosed, are empty and are now owned by banks. These would also await deconstruction by the same teams, but would be at the end of the queue. In this case, as land values recover, banks would see some of their asset values recover as well.

So who wins and who loses? There would be a quick round of losses felt mostly by lenders and a 10 year period of transition as people move around and infrastructure adjusts. Big-box retailers and exurb commercial developers would probably complain. But by long-viewed financial measures, banks, borrower's balance sheets, small, mid-sized and flexible businesses and communities would be strengthened. And it would be up to us to decide if the idea meets our aspirational needs. We’d have to live closer together, and we’d not have as much storage so we’d have to have less stuff. We’d drive fewer miles, and demand better, more flexible, more convenient and safer public transportation and education systems. Schools facing declining enrollment and budget crisis would be strengthened by an influx of active families taking an interest in their improvement. Water and electric systems would have to be modernized. We’d use less energy while at the same time, employ more people (that we know). We’d borrow less but longer, so we’d have to find a way to get along where we live.

And overall, our collective wealth would begin to matter on the world stage again. It would come from labor and smart design, not short-selling. Its basis would be assets and innovation, not depreciation. It would account for long term uses of land and resources. It would reflect a balanced supply of homes and buildings to the demands of the people in them. And finally, we would be reminded that we are neighbors, and that neighborhoods were once, and can again be, a good thing for America.

- N. Hayes, May 7, 2010


Note: But it appears we've elected to take a different path: http://www.nytimes.com/2010/05/16/business/16builder.html?hp