Proposal for Free Homes for Police Is Rich in Spirit, Poor in Practice

By Dr. Duru written for One-Twenty

January 12, 2009

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On Monday, January 5, 2009, Georgia's Fulton County Commissioner Robb Pitts distributed a press release regarding a proposal for offering free homes to police officers:

Commissioner Pitts Proposes Free Homes for Police Officers
Today, Fulton County Commissioner Robb Pitts released preliminary details of a pilot program that would give free homes to police officers.
Pitts said, “Since most jurisdictions cannot pay police officers what they deserve, providing free homes to them would be a substantial supplement to their salaries and a good tool for recruitment and retention.”
Under the program, police officers would have to pay a down payment of $2,500 and commit to 15 years of service with the department in order to receive a free home, and it would have to be their primary residence. At the end of 15 years they would be given the deed to the home. During the interim, they would be responsible for all taxes, insurance, utilities and maintenance.
Additionally, Pitts said “the collapse of the subprime market has resulted in a huge glut of abandoned and vacant homes that negatively impact our communities. And I would like to see these single family homes occupied by police officers.”
The mortgage holders, in addition to the good will that would accrue to them for assisting with public safety in the communities in which they do business, could also be eligible for tax credits.
Pitts envisions this program to be applicable to cities and counties across the country.

The spirit of this proposal is a good one. Pitts would provide police officers a financial incentive to join and stay with the force, and neighborhoods emptying out from foreclosures would receive some relief (and presumably a bit of security). However, I see several flaws in this proposal that would make it poor in practice. Let's start with the notion that this helps solve the foreclosure crisis.

When an officer buys a foreclosed home, he will need to sell his/her current home. Assuming in the current challenging market such a sale would even happen in a timely manner, this shift in housing demand provides no net gain. It shifts a homeowner from one house to another (of course, you could counter that the resulting chain of housing transactions will eventually include someone who does not already own a home or is buying an additional home). One exception occurs when an officer rents out the former house. My opinion is that if such a rental market exists at profitable prices for the existing home and an officer is already inclined to become a landlord, then the officer already has enough incentive to go buy a second home. If rental profits do not exist, taxpayers should not subsidize the rents for unprofitable real estate ventures. Another exception occurs when an officer is a first-time homebuyer. The Fulton County Police Department is 18 officers short of its 148 target. As of last August, the city of Atlanta (Fulton County's main city), had 53 open positions. If we assume that all 71 of these new officers are first-time homebuyers, we at best get a drop in the bucket for housing consumption when compared to the 9464 homes listed by RealtyTrac as either being bank-owned or real-estate-owned (REO).

Granted, something is better than nothing, so kudos for making an effort to figure out how to unload these foreclosed homes when demand remains anemic. So let's next look at this proposal from the officer's (hypothetical) point-of-view. The big catch on this deal is the 15-year contract. Assuming most new officers are relatively young, a 15-year restrictive contract is one tremendous burden to carry. So much happens in a young person's life from 20-35 or 25-40, including marriage and kids, that it is not clear that the house such an officer buys now would still be the house needed or wanted in the future. Of course, such risk can be mitigated by going for the largest (and most expensive) foreclosed homes on the market...but something tells me that the local government would establish a cap on the value of the homes that will qualify. The preliminary proposal does not provide an exit clause, but if the officer forfeits the house and all capital gains if s/he either moves or leaves the force in less than 15 years, the officer would lose a lot of time and opportunity in building housing wealth (once the market stabilizes and grows again of course). Thus, we have a situation where large disincentives exist that would dissuade a young officer from signing on.

This housing benefit is a large one considering that the median price of a home in Atlanta is about $210K, the starting salary for Fulton County police officers ranges from $32-38K and $39-$42K for Atlanta city officers. Let's assume that we can get a foreclosed "median home" for a large 40% discount. The down payment relief alone is still worth almost $23K in up-front money on a 20% down loan. The monthly mortgage relief equals about $972 on a 15-year fixed at 4.625%. This is indeed one "substantial benefit." It's like a signing bonus and a 30% annual raise. I have to assume that existing officers will feel almost cheated if they could not access these same tremendous benefits, especially those officers who do not have another 15 years of service remaining before retirement. But most existing officers are probably also existing homeowners, and we are back to the problem of simply shifting housing demand and not adding new demand. In the end, if I were a police officer, I would ask for this money in cash and spend it as I choose, not as the government chooses. If housing is the most efficient allocation of these resources, then that is where it will likely end up. Otherwise, it will stimulate the economy in better ways.

Finally, let's consider the potential financing for this proposal. The financing for this program is not clear, but it seems that lenders might be expected to pick up some of the tab in order to get the foreclosed properties off their books. I cannot imagine how or why a bank would underwrite a large portion of the cost of this program, so let's just assume that the local government pays the bulk of the cost. The Federal government has provided Atlanta $16M in grant money to rebuild neighborhoods overcome with foreclosure as part of its national Neighborhood Stabilization Program, but there already exists a surge in applications for this money. So, the money must come from local revenue sources. The City of Atlanta has frozen hiring for its 53 vacant positions and has recently CUT the pay of its police officers by 10%. So I assume there is no money in the city budget for such a program. Fulton County seems to be in better shape with $59.7M in reserves. This is clearly enough money to pay for free homes for 18, even 148, officers. But when we consider that other public servants, such as folks in the fire department, will make justifiable claims that they too deserve free homes, the county will likely be better off considering a fair formula for comprehensive pay increases to spend down its surplus...or better yet, offer up refunds on property taxes! In fact, it is very possible that property tax relief could PREVENT more future foreclosures than the free homes that police officers could consume.

Be careful out there!

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© DR. DURU®, 2008