Why are Banks Literally Bulldozing Foreclosed Homes?
According to the laws of supply and demand, if you lower the supply, you drive up the price, and banks seem to be taking that economics 101 tidbit pretty seriously. The Atlantic reports that banks have begun to bulldoze foreclosed homes to help drive up property values in others. “The idea is that a bank donates a foreclosed home and possibly even pays for its demolition. One recent example is Bank of America (NYSE:BAC) donating 100 foreclosed homes to a Cleveland-area agency that will revitalize [demolish] the property for other uses…The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming.”
BofA isn’t the only major mortgage broker sending in the heavy machinery, with Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), and Fannie Mae (FNMA) getting in on the action. What’s in it for the banks? Instead of holding a litany of foreclosed properties with dwindling asset value, not to mention expensive upkeep costs, the banks level the houses and donate the property to local governments. In doing so they are often eligible for tax breaks, with write-offs allowing them to “deduct as much as the homes’ fair-market value,” from income statements.
This strategy should also work wonders for the real-estate market (NYSE:IYR), as experts in both the private and public sector agree that the biggest current drag on the housing market is the crop of foreclosed properties. Some question whether this is the most efficient use of resources, arguing that the homes might be better off converted to condos, subsidized housing for lower-income families, or offered as commercial properties. Regardless, the development is at least a sign that someone is taking action to help kick-start the housing market, and June’s surprisingly positive home sales data may be the first token of evidence that the tactic is having a benevolent macroeconomic impact.