THE BLOG

Home Economics 101: George Will And Niall Ferguson Flunk

11/06/2011 03:45 pm ET | Updated Jan 06, 2012

In the "Green Room" roundtable discussion that follows the taping of ABC's This Week, Arianna Huffington brought up the idea of Right to Rent. The basic plan is to allow homeowners to stay in their home for a substantial period of time (e.g. 5 years) following a foreclosure. During this time, they would pay the market rent as determined by an independent appraiser. This plan requires no government money and no big new bureaucracy. (More details of the proposal are available here.)

Right to Rent benefits not only the homeowner, but also the larger community. It prevents foreclosures from becoming eyesores and hazards for neighborhoods as abandoned properties go unmaintained and possibly become drug houses or havens for other criminal activities. By keeping the home occupied with a long-term tenant, Right to Rent should prevent the sort of deterioration that drives down both property values and the quality of life in a neighborhood. This is the sort of logic that recently led the plan to be adopted on a large scale by Ireland's government.

Ms. Huffington's roundtable partners, George Will and Niall Ferguson, quickly dismissed the proposal, both insisting that she was wrong to assume that it would be cheaper to rent than to pay the mortgage on their homes. Will and Ferguson need to review the data.

The people facing foreclosure mostly purchased their homes at bubble inflated prices in the years 2002-2007. In the most inflated markets, like Las Vegas or Phoenix, sales prices were 25 to 30 times annual rents at the peak of the bubble. If a house was purchased at 25 times its annual rent, then a 4 percent mortgage would just equal the annual rent. Of course most of the people who are underwater are likely paying considerably more than 4 percent on their mortgage. A 5 percent mortgage would put them 25 percent above the cost of renting, while a 6 percent mortgage would put them 50 percent above the cost of renting.

If we assume that property taxes are equal to roughly 1 percent of the sale price and that insurance and maintenance are another 1 percent, then monthly ownership costs can easily be twice as much as the market rent on the same house. Here are some calculations of the potential savings from Right to Rent in the nation's largest housing markets.