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How to get ahead of the next housing downturn

The public needs to take a lesson from the private sector and capitalize on the downturn in real estate in order to guarantee affordable housing.

A "Resist Evictions" rally to protest evictions, on Aug. 10 in New York City.Michael M. Santiago/Getty

We’ve been here in the real estate cycle before.

In the early 1990s, a banking crisis combined with a real estate recession led to tens of thousands of rental units going into foreclosure. As the Resolution Trust Corporation began disposing $450 billion worth of real estate from collapsed savings banks, up for grabs was the fate of thousands of apartment buildings across the country.

Despite advocates pressing to turn these assets into affordable rental housing, hurdles in the system resulted in relatively few properties increasing the supply of permanently affordable housing. Instead, cash-rich for-profit investors moved nimbly to buy apartments from the public at a deep discount and later flipped them for a significant profit. Tens of billions of dollars in public investment into failed savings loans could have been converted into meaningful housing stock, but the opportunity was largely missed.


In 2008, as the subprime foreclosure crisis gripped the country, public agencies again ended up with a growing inventory of real estate assets from failed banks, particularly foreclosed homes in thousands of low- and moderate-income neighborhoods. In response, a coalition of organizations proposed an ambitious program so that community-based organizations could buy properties out of foreclosure. The stabilization of falling home prices prevented further property value plunges and disinvestment while increasing stock of affordable housing in hard-hit communities.

This Neighborhood Stabilization Program, despite flaws, enabled thousands of apartments across Massachusetts to be acquired and renovated, such as on Boston’s Hendry Street, where, by 2009, half of the 20 properties on the street were foreclosed, and vacant buildings had been taken over by gangs. But because national funding levels fell far short of the need, and regulatory restrictions hamstrung community groups, the program fell short of its ambitious goals. Predictably, private investors once again snapped up properties, rented them out until the market stabilized, and then once again flipped them for a significant profit.


It is rare to get a third chance, in life or politics. But as the economic impacts of the coronavirus pandemic continue to unfold, a coming wave of defaults, workouts, and foreclosures on a massive scale call for government leaders to make preparations now.

As of Aug. 6, the percentage of renters paying on time has slumped to 79.3 percent, down nearly two points from June. Of renters in so-called Class C properties — catering to lower-wage working families — only 37 percent of households had paid rent by the middle of July; paying rent on time has dropped off to 26 percent. A study released earlier this month by City Life/Vida Urbana and researchers from MIT’s Department of Urban Studies and Planning found that more than 300,000 renters in the Commonwealth lack confidence that they can pay rent this month.

It does not take a crystal ball to look ahead and see an impending real estate downturn. Although as many as 33 million Americans may be out of work, the $600 per month in federal unemployment benefits ended in July with Republicans in Congress thus far refusing to extend them. Aiding families to pay their rent would be the best approach, but time is slipping away.

At the same time, the federal eviction protections expired last month, and many state eviction moratoriums outside Massachusetts have ended.


Some are predicting as many as 28 million tenants will face evictions by September, nearly 25 percent of America’s renter population. Displacement on that scale would vastly dwarf the foreclosures of 2009 that plunged America into deep recession.

If we have learned anything so as not to be doomed to repeat the mistakes of the past, then a flexible source of funding, plus a system for turning distressed properties into affordable ones, must be created. We should get ahead of the curve and enact a Stabilization Acquisition Emergency Fund, which would expand the national stock of decent, safe rental housing for working families.

The fund would build on past models and flow capital to community-based organizations with capacity to acquire and manage rental housing. Acquisitions could be existing properties whose owners face potential mortgage default and are willing to sell due to the general economic impact of the pandemic.

A second class of properties are hotels being repositioned as rental housing. California has taken a lead, allocating $600 million to groups converting hotels into housing for the homeless. But private-sector hedge funds see the same opportunity, and without an infusion from the Stabilization Acquisition Emergency Fund, developers will again have the market advantage.

Admittedly, there will be many critical details of the program to work out. The first is modeling the scale necessary to make a difference in the long term. There may be multiple millions of appropriate rental properties coming into the market in the near term. If, in fact, Americans suffer tens of millions of evictions and foreclosures in the coming months and years, a fund that reaches only 1 million households will again fall short.


Similarly, the fund will not work if community groups are tied up with burdensome constraints that put them at a disadvantage to hedge fund investors. This undermined the well-intentioned efforts by the Resolution Trust Corp. and Neighborhood Stabilization Program, where nonprofit buyers were saddled with many procedural and regulatory burdens, while private capital nimbly bought low and sold high.

Real estate runs in cycles, and those who take advantage of down cycles profit in the long term. The public must take a lesson from the private sector and line up the capital and the strategy today to be ready to buy tomorrow — and benefit the greater good in the future.

David M. Abromowitz is a real estate attorney in Boston and past chair of the National Housing & Rehabilitation Association.