Summary: an analysis of the core problem in the US housing market, a problem often ignored by analysts.
The years from 1929 to 1933 were, for America, a succession of breaking idols and abandoned faiths, some of them the notions of willful children, some deeply ingrained in the character of the nation.
— The Years of the Locust: America 1929 – 1932, Vivian Seldes (1933)
The core of the housing crisis is overbuilding, which has created an excess supply of housing units (broadly defined). Today there are roughly 4 – 5 million vacant housing units above historical average rates (as a % all units). For example, the Census Department’s Housing Vacancy Survey shows that 2.8% of owner-occupied units (i.e., not rentals) are vacant, almost 2x the historical average of 1.5%.
These vacant units are a burden to their owners, tieing up capital and costly to maintain. Whether sold or rented, they drive down prices. Excess supply is difficult to absorb for high cost and long life goods like housing. There are no easy fixes, and these vacant homes might vex the market for several years.
Measure to encourage homeownership or home purchases are of marginal effectiveness (e.g., tax breaks, lower interest rates, government aid). Almost everyone is already living in a “unit”. For example, at what interest rate would you buy a 2nd (additional) home in your neighborhood for your family to live in? These programs can increase space occupied by households, helping people move into larger units. Also, by reducing the cost of living, these programs might encourage some formation of new households by getting adult offspring out of their parents’ homes.
There are two powerful solutions
(1) Eventually our population will increase to fill these homes. But slowly.
Our population grows (net new households) from more children leaving home than households disappearing through death. And net migration into America. These rates change over time. Our slowing economy might already be slowing the rate of in-migration. A recession or political turmoil in Mexico might send floods of people north into America.
(2) Not so creative destruction
Many vacant homes will be destroyed, the fast track to fixing this problem. Empty houses get vandalized, destroyed by the owners (spite or insurance fraud), occupied by squatters or meth labs, or wrecked by the forces of nature. In regions with net out-migration (e.g., Detroit) homes remain vacant for long periods, often abandoned by their owners (valueless but costly due to taxes and maintenance). As anyone familiar with the history of the South Bronx knows, empty homes acts as an infectious blight that can devastate larger areas. After a decade or two, the result can look like Dresden after the bombing in 1945.
Here is one way the government can fix the housing crisis: buy and destroy homes. The government did this with food during the Depression, in order to increase food prices (to help farmers). That was tough on food consumers, just as destroying houses would increase living costs. Despite what politicians say, that is how most government programs work — aiding one group at the expense of another group (often a much larger but less organized group).
Effects of too many vacant homes
The excess number of vacant homes will exert downward pressure on home prices and rents (in aggregate, vacant homes tend to become rentals). Prices will stabilize eventually, when they reach a point at which investors will voluntarily accumulate inventory – vacant homes, which they will maintain until they can be sold or rented. Under normal circumstances there is little housing inventory. Due to the cost of homes (tied up capital, often financed) and the expense of maintaining them, there is little voluntary inventory. For example, builders like to have new homes sold prior to completion.
This is one way of calculating a floor price for homes. I have seen no attempts to determine this number, but it implies a low ultimate price for homes. Below the equilibrium price calculated by the usual metrics, such as price to rent or home price to income ratios. That is because too many vacant units is a disequilibrium, preventing normal dynamics from stabilizing the home marketplace.
How did this happen?
There are many reasons. A combination of speculative activity (the Minsky cycle), excessive subsidies, lax lending, lax regulation of lenders, etc. Does it matter now? The crisis itself will force massive changes to home construction, finance, and ownership dynamics. When things settle down we can look at the resulting situation and discuss reforms. Until then discussing reforms is building castles in the air.
Epilog
Much of the capital to build these excess homes came from foreign investors. I doubt they are happy with the results. Their views — our creditor’s views — on how the process should change might have more weight than ours (the debtors and future borrowers).
In this country we have long considered the Federal Reserve master of its own domain, able to direct and effect our course. As the rest of the world’s economies emerge we will be forced to consider that our central bank is just one in a global community of central banks. As that occurs foreign central banks will, rightfully, have more influence and input in our decisions and we will be forced to consider that.
— Charles Kindleberger, speaking in 2002 to Joshua Rosner of Graham Fisher, as reported in his report of 16 September 2008. Kindleberger was a historical economist and author of over 30 books. He is best known for his 1978 book Manias, Panics, and Crashes. Rosner’s summary: “We are not alone, we are but one player in a global community and right now we are not holding many of the cards.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Key Treasury Department documents
We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us. See this page for a current list of Treasury Department documents.
Some FM posts about the current crisis
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Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
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High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
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Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
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Another voice warning about the nationalization of AIG, 18 September 2008
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A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
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A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
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Another step away from our Constitutional system, with applause, 19 September 2008
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What do we know about the financial crisis? What are the key questions?, 20 September 2008
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Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
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America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
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Legal experts discuss if the Paulson Plan is legal, 21 September 2008
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.
A few of the most important posts warning about this crisis
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. Here are some of those posts.
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A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
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The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
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“The changing balance of global financial power”, by Brad Setser, 22 August 2008
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“The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime.
Unfortunatly, its not effective. For many areas that are bubble-impacted, eg, SF Bay Area (as a resident, a market I’ve followed with significant interest), LA area, San Diego, etc, although there is overbuilding, it is a symptom, not the disease, of the bubble and the overbuilding took place far out in the suburb/exurbs. There really aren’t significant vacant propreties in the closer-in core, but prices here have also fallen greatly.
Additionally, this would greatly INCREASE the costs to the taxpayer or somebody. Even out in Rio Vista, Brentwood, Merced or the Las Vegas burbs (which ARE grossly overbuilt), a bank with a property can unload it at a price close-to/at replacement costs even today. The value is not zero, but still significantly positive.
If the house is to be torn down, who takes this huge additional loss? The taxpayers?
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Fabius Maximus:
“overbuilding, it is a symptom, not the disease”
Overbuilding is not a symptom, it is one aspect of the problem. This distinction is easily seen. If all other aspects were fixed but the oversupply remains, we would still have serious problems.
“Your analogy is not accurately stated. Housing values within a metropolitan area are interlinked. Oversupply in one area puts price pressure on the whole, as there is arbitrage between them (I can easily move from A to B, still keeping my job).”
As I said, oversupply is only one aspect of the problem. Single-factor models are useful analytically to illustrate individual dynamics, but seldom fully capture the situation.
“Additionally, this would greatly INCREASE the costs to the taxpayer or somebody.”
I do not know know what you mean by “this.” Destruction of vacant properties is a fact of life, happening today in areas with high vacancy rates. Yes, it results in large losses. So?
Perhaps by “this” you refer to the government buying and destroying homes? It’s been done before with other goods (as in my example from the 1930’s). It is expensive, pehaps wasteful, but neither of these things are unusual for government programs.
I thought of this while considering a response to your unusually concrete and somewhat misguided proposition for a little “creative destruction” (because Schumpeter was really talking about the New driving out the Old, not the artificial manipulation of supply or demand…):
1- Why did it take six years for Graham-Fisher to publish a report (a link, please? … see below) that apparently stated the obvious?
… especially because both Kindleberger and Galbraith passed away in recent years. Isn’t it about time that these guys be given their due for having understood the dangerous vicissitudes of all economic systems – and those of modern industrial capitalism, in particular – and that they should receive credit for having contributed positively in the long run to our collective well-being (rather than having been vilified as ‘closet socialists’ or the like…).
2- This morning, the Graham-Fisher website (www.graham-fisher.com) contains just this:
“Please excuse our appearance as we are upgrading our site.” [on 9/18/08 at 8:48 am EDT]
Note: this is not a critic of the company or of the author, Mr. Rosner, who I saw on Charlie Rose the other night and who was quite lucid if I remember correctly. I just find it ironic that the public face of this company would be “down” at such a critical moment, though it looks like their subscription-based site is working…
3- Why is it inappropriate to discuss causes while considering solutions… especially for those people of potential responsibility going forward (every candidate from POTUS to Congress to dog catcher…)?
… because I would completely agree that ‘tough talk’ about either the past or the future is no substitute for either a clearheaded what to do next, but that can only be based on an equally thoughtful consideration of what happened (and no, another commission is not needed… because if these future leaders don’t know now, six (or eight) more years of thinking about it won’t get us anywhere…).
Now, to the specific point of reducing the supposedly excessive oversupply of unoccupied residences…
… What would that do other than artificially reset the value of remaining properties when supply decreases?
… Who would “pay” for those properties, how would they be priced, and who would receive those payments?
… Isn’t there a very fundamental difference between destroying perishable commodities such as food stuffs and the deliberate destruction of durable goods… a home being the most central and durable good of all in most people’s lives?
I would offer an alternative, if I may, that would be useful for the US automobile industry: offer tax credits for folks who replace older cars – especially gas guzzlers – with newer, more efficient and “green” models… and offer tax incentives to the car dealers who dispose of those vehicles rather than reselling them. It would be great for US-based car manufacturing to benefit from this more than foreign-based manufacturing…
Could something like this work for the housing oversupply?
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Fabius Maximus replies: I do not understand most of your comment.
(1) Esp the point of your comments about Graham-Fisher. Probably 95% of the analysis in the media “apparently state the obvious”. Do you write every one of them with this complaint?
(2) The comment about their website being down is absurd. These things happen often, esp for small firms lacking IT staff. The public website is not a core or critical function for many firms. (I have two computers, both < 3 years old. One doesn’t work well; the other lately is a frequently making long visits to the local repair shop.)
(3) Why do you say “supposedly excessive oversupply”. Do you question the Census department numbers, the frequent reports in the media about problems resulting from vacant homes, or some other objection?
(4) You missunderstand my comment about destroying homes. It is just something the government might do, consistent with past practice (both in the 1930’s and in 1970’s adn 1980’s South Bronx).
(5) I do not understand your proposal for housing. Govt aid if you destroy your old home?
This “vital” contribution to our financial meltdown seems to be another red herring. Homes were not overbuilt in a vacuum. They were overbuilt because of an excess of capital searching for profitable areas of investment. The excess inventory of homes is not a cause of our current condition, but an effect. (Maybe that is what you meant.)
Of course it’s disturbing to see our long-occupied and prudently nurtured home value declining because of someone else’s imprudent over-building. But in most cases, apparently, recent home values were artifically high, just as, perhaps, recent commodity prices were artificially low. We couldn’t go on living in that twin artifical paradise forever.
Buying and destroying the excess housing inventory, as a way of bolstering the prices of long-occupied homes, seems to be a rather socially cruel solution.
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Fabius Maximus replies: Is this some sort of government-required “statement of the obvious” comment, perhaps boilerplate to use up surplus electrons? This is a discussion of a specific phystical element of the housing crisis, one often ignored. It does not purport to be a master analysis of the situation, or a single-factor explanation.
“Homes were not overbuilt in a vacuum. They were overbuilt because …”
Of course this physical result had causes. Does any reader of this site believe otherwise? I doubt many folks today understand the concept of a final cause.)
“Of course there were other factors involved.”
Wow! Thanks for telling us; who would have guessed that. (I specifically stated this).
The housing crisis will probably (not necessarily) have a “socially cruel solution.” History shows that most major events on this scale do. You do not have to like it.
I did some math on this a a while ago and end up with 1.65 million houses that will have to be destroyed to get vacancy rates back to normal levels. At $100k each (buy and destroy), that is doable.
Update: Oops – had to correct my numbers. About 1.9 million houses to be destroyed to get back to normal level vacancy rates. Still doable.
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Fabius Maximus replies: Your calculations appear to include only the first two categories of vacant units, and ignore the other two major categories. Look at the table
Vacant units in Q2: 12,719 million.
…For Rent: 4,008
…For Sale: 2,169
…Undecided: 6,542
…Awaiting oc: 1,145 (awaiting occupancy, which will in turn vacant another unit)
** There are other types of vacant units, but these are the important ones.
Fabius: Supply/demand actually has relatively low impact in housing BUBBLES. If supply/demand is out of whack, you expect rents to behave in concert with purchase price.
EG, manhattan, although expensive, did not bubble nearly so much as other areas: you could evaluate rent vs buy deltas and see this. As a consequence, manhattan prices have not dropped as much either. Likewise, I live (rent) in Napa. Napa is most decidedly NOT overbuilt, and the people who are living here are lifestyle: prices in american canyon actually have very little effect on the napa valley proper.
Yet prices have dropped a good 20% for puchase price, yet there aren’t significant vacancies or a significant oversupply, and rent hasn’t gone down a bit. Thus in two areas, both with significant supply limits, show remarkably different behavior, but both show significant bubble effects.
Overbuilding is the symtom (or, you can argue, A disease) in the exurbs, but it is not the root problem in the core areas, it was a reaction TO the bubble in prices, and deliberately removing the overhang won’t significantly increase prices in the core areas (as witnessed by price drops in areas where external supply has relatively low impact, such as Napa, San Francisco, Berkeley), and probably won’t increase prices much in the exurbs (who wants to live in F#@)(* merced anyway?)
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Fabius Maximus replies: I specifically said that this was a vital aspect of the problem, not the master single-factor. The title seemed quite clear to me. What about these words was unclear to you?
“Napa is most decidedly NOT overbuilt,”
Than it is not relevant to my analysis, which did not purport to give the master cause for all housing price movements or every aspect of the problem.
Comparing events in Napa to those in severely affected areas is IMO obtuse, as if the “my house is worth less” anguish compares to the massive personal cost and suffering in areas like the Inland Valley of California and Detroit (and to a lesser extent in many exurbs). Those have waterfall-like price declines and astonishingly high rates of home vacancies. Since they have net outmigration, the excess housing supply will likely be destroyed over time — one way or another.
who wants to live in F#@)(* merced anyway?)
Much could be said about this astonishing remark. Perhaps it is just as well that I do not have time to do so.
I am note sure what your point is. You seem to be saying that price moves are the key aspect of the problem. Prices movements are an inherent aspect of markets, with large price moves — in the long tail of the distribution — inevitable over time. There are always reasons these things happen, but the salient fact is that they do happen.
A stable housing finance regime must survive these price events rather than plan (or hope) to make them impossible.
{FM note: This is a bit long and complex, so I will insert comments into the text for clarity.}
And so, I ‘explain’…
“Fabius Maximus replies: I do not understand most of your comment. (1) Esp the point of your comments about Graham-Fisher … (2) The comment about their website being down is absurd…”
… I agree, of course, but frustration at not being able to read the report got the better of me (though I did include a caveat that did not point an accusatory finger at Graham-Fisher). The fundamental point, however, is that Kindleberger and others were offering these warnings for many decades while calling for proactive measures to soften both the cyclical bumps and grinds in the markets and the longer trends toward a more global economy in which the US would be but one factor, and perhaps not the predominant one… and that they largely went unheeded and derisively dismissed by the laissez-faire redux pack…
*** FM: Not everything is either a public report /andor online. Nor should it be.
Also: These warnings were ignored by almost everybody, not just the “laissez-faire pack.”
“(3) Why do you say “supposedly excessive oversupply”. Do you question the Census department numbers, the frequent reports in the media about problems resulting from vacant homes, or some other objection?”
No, I just make the distinction between residences that are unoccupied because most people would not want to live in them and residences that are unoccupied because nobody can afford to live in them. I will stipulate, however, that there is now a excess in inventories that somehow must be reduced… but there should be some distinction between the bailing out of developers and their banks by buying up and destroying perfectly good new homes that nobody is able to live in versus the reduction of the trailer parks and economic ghettos that many are still trapped within…
** FM: This misses the point. We have too many units. If they were all wonderful and cheap, there would still be vacant units. This could be an opportunity to upgrade folks to nicer homes, but the mechanics are difficult. Many of the homes are in areas with net-outmigration. And the social dynamics of moving inner city households into the suburbs are non-trivial (as some recent research has shown).
“(4) You missunderstand my comment about destroying homes. It is just something the government might do, consistent with past practice (both in the 1930’s and in 1970’s adn 1980’s South Bronx).”
No, I agree in the case of the development and/or renewal of stagnant backwater communities (whether rural, urban, or something in between (“suburban”?)). But I insist that this is NOT “creative destruction” in Schumpeter’s terms (unless something like my answer to (5) were to occur…)
** FM: Did you misread the text? I said this was “not so creative destruction.”
“(5) I do not understand your proposal for housing. Govt aid if you destroy your old home?”
No, tax incentives to both investors and endusers to destroy ‘outdated’ properties while updating other properties (whether new or old) to be more energy efficient, etc. The example of the auto industry actually has a test case in France where in the 80’s the government gave a tax incentive to get high-polluting/low-mileage autos off the road when the owner bought a new car and disposed of the old one… with the underlying goal of reinvigorating the French auto industry (and it worked on both accounts). I admit that this would be more complicated in the context of housing…
I guess I’m somewhat sentimental and/or too discriminating in that I do not consider substitution a universal concept, be it when discussing guns-for-butter or when comparing the economic impact of the overproduction of perishable foodstuffs with the current excessive inventory of unoccupied homes, apartments, and office space.
The obvious answer is enforced immigration. Track down furriners who are critical of the United States and make them part of the solution instead of part of the problem. After all, they would only be living in the housing that Americans don’t want.
Hey, it worked for the British Navy back in the day.
:-)
I think you have to tackle banking industry regulation before anything else, including all the investment banks and Sovereign funds washing around in there. Mainly the use of opaque, highly leveraged derivative deals which has ballooned the risk from a 10 Trillion dollar market to a 300 trillion dollars (not accurate figures but close to accurate ratio of 30-1 ish), THAT is the major problem. First that must be deal with. You are right that the current oversupply will provide ongoing problems in the housing market, but the housing market is just the latest tulip used in the credit bubble. The key difference now is that it is not really a housing bubble we have, rather an enormous credit bubble. There is nowhere else this money can go since the system has been buying into itself finally. It simply has to be destroyed, and this before changing the housing supply.
It looks like many tried getting into commodities to improve their balance sheets, but once regulators started to get busy this July (finally), lots of that has been leaving. Listed ‘Commercials’ who figure in the COT reports have been heavily buying oil lately from the highs down which is not usual timing with them, but clearly there has been a huge selloff by parties that are not shown in the COT and which are rumoured to have been dwarfing the usual market participants.
With any luck, it means they are out of that area now (also grains and metals) and/or they have been selling out to keep their books straight as other losses have been accruing. In either case, we won’t know because all these markets are essentially unregulated as the so-called ‘conservatives’ have been pushing for a couple of decades now.
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Fabius Maximus replies: I disagree with this.
“I think you have to tackle banking industry regulation before anything else”
Changing financial industry regulation in a crisis is both unlikely to have any short-term impact and will probably be done wrong. For example, proposals to ban sub-prime lending are absurd, as that market is almost gone. During a crisis emotional and publicity-seeking nonsense will get frozen into law. Only after the crisis, when tempers cool and analysts refect on the data, can we determine what must be done to prevent a repetition of these events.
Most of the rest is also probably incorrect, but beyond the scope of this blog for analysis.
Demand isn’t as static as you postulated. There is the question of household formation – how many 25-year olds have moved back home with mom and dad because they can’t afford a place of their own?
Household formation take place for a number of reasons. Among them are marriages, divoces, young people moving out/back home, etc.
The bullish case: If employment holds up and housing prices are down then there will be increased demand from lower housing prices.
The bearish case: If employment doesn’t hold up household formation could be below trend and exacerbate the economic downturn.
I don’t have access to the data so I can’t quantify these effects but they are there.
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Fabius Maximus replies: Did you read my post?
“Among them are marriages, divoces, young people moving out/back home, etc.”
Marriages and young people moving out are part of the normal aging process, which I described as “more children leaving home.” Divorce and young people moving back are trivial compared this and net migration.
“Demand isn’t as static as you postulated.”
I specifically stated that “These rates change over time.”
Great headline — too much supply of housing certainly means lower prices.
I’d argue that the gov’t needs to encourage MORE home-ownership, to help reduce the unbought units:
accept more Green Card immigrants who have (or can get) $20 000 k as a down payment on a house purchase, offer a new GI-Housing bill to all returning Vets, up to some $40 000 as a gov’t second mortgage loan, 5 years of no interest. (Note that it’s a loan, not a grant, so the long term cost to the gov’t is admin cost and foregone interest; perhaps set the interest at 3% like student loans).
Offer gas-use reduction downpayment loans to folks willing to move closer to their work (at least 5 miles closer).
The gov’t could also buy more homes, and voluntarily relocate slum dwellers willing to leave their slums (perhaps for lower rent for 5 years?) — and then destroy the slum housing. (Altho this might spread crime.)
The point is to get a lot more buyers buying homes. While the excess supply will keep prices low, and reduce any appreciation, the real disaster for the banks is the uncertainty of any value — the bottom hasn’t been reached yet. Investors don’t want to invest until such bottom.
Finally, the ‘house building’ industry will remain in terrible shape until the excess supply is reduced. It would be an excellent time for all local, state, and fed gov’t to be repairing/ building roads and bridges and infrastructure. Not ‘make work’, but previously deferred work. The construction industry needs as much or more help as the banking industry — and repairs need to be done sometime.
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Fabius Maximus replies: Some of this misses my point.
“I’d argue that the gov’t needs to encourage MORE home-ownership. … The point is to get a lot more buyers buying homes.”
There is an excess of units over households. What you are referring to is moving renters into owners, which policy is one of the things that got us into this mess. It is however irrelevant to absorption of the excess vacant housing units.
Fabius Maximus replies: Your calculations appear to include only the first two categories of vacant units, and ignore the other two major categories. Look at the table
Vacant units in Q2: 12,719 million.
…For Rent: 4,008
…For Sale: 2,169
…Undecided: 6,542
…Awaiting oc: 1,145 (awaiting occupancy, which will in turn vacant another unit)
** There are other types of vacant units, but these are the important ones.
Yes there are other types. But you argue, correctly in my view, by using higher vacancy levels. My calculation is about returning those higher vacancy levels to their historical norm.
There will always be vacant units in various states. There is no need to destroy holiday homes or huts for seasonal use or the natural fluctuation reserve. The aim now has to be to bring the market back into its equilibrium. That can work as there has been no catastrophic event that essentially changed the long term market.
The equilibrium is expressed in the vacation rates. To get those back to the historical levels, my numbers (calculation here) are the correct ones.
You claim Today there are roughly 4 – 5 million vacant housing units above historical average rates. I do not find that reflected in any statistics at census.gov.
Could you please explain how you arrived at those numbers?
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Fabius Maximus replies: They are right there in the HVS, table 8.
“I do not find that reflected in any statistics at census.gov.”
Nor are your figures “reflected” in any statistics at the Census, as they do not give this calculation. It is, however widely given in reports on housing.
It is easy to check your numbers. Your calculate total units as 39.5 million for rentals and 77.9 for own-oc, for a total of 117.4 million. The census gives a total of 129.871 million units.
You calcuate the number of vacancies as 4 million rentals and 2.2 own-oc, for a total of 6.2 million units. The census gives a total of 13.864 million year-around vacant units.
You calcuate the number of total units from occupied own-oc and rental units, totals and vacancy rates. Just use the actual census numbers for total occupied and vacant by category, compared with the actual numbers of vacant units by category.
I apologize for my comment on Merced. But its actually a big symptom and where the overbuilding DID occur, and its places like that that now have the huge vacancy issues.
People felt they HAD to buy, and buy now, lest they be locked out forever. The heavily zoned areas around the major cities were too expensive, so people built and bought out in exurbs like los banyos, brentwood, and merced.
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Fabius Maximus replies: As with other comments above, I agree — there are reasons for the physical oversupply. Did anyone doubt that?
My point was first that the physical oversupply is a core issue, representing physical plants that must either be stored or destroyed until we have people to occupy them. Playing games with tax credits and even more lavish subsides for home owners … these are irrelevant to this aspect of the problem.
Second, that this oversupply is driving the core harmful aspects. This is not, as in Napa, people watching the value of their homes decline. The problem are foreclosures and bankruptcies, people losing everything. Plus the devastation of communities with large numbers of vacant units. Fires, squatters, meth labs — classic forms of urban blight which can rapidly spread to destroy large areas.
I was quite determined not to post another article about Tax on this website. Searching through this post however one can see it has been mentioned a few times already, so I don’t feel so guilty in doing so.
People in a reading mood might want to direct their browsers to the wikipedia article on Land value tax. Which states that “Real estate bubbles direct savings towards rent seeking activities rather than other investments, and can contribute to recessions which damage the entire economy. Advocates of the land tax claim that it reduces the speculative element in land pricing, thereby leaving more money for productive capital investment and making the economy more stable.”
It is an interesting article and food for thought. May have a number of benefits if implemented at a Federal level, especially if used to replace other taxes.
OK, I capitulate on two specifics (in response to #6):
– I did apparently miss the “not so” qualifier to “creative destruction” because I should have noted the intended irony rather than suggest an error in the formulation…
– The report that quotes Kindleberger would have been nice to read, but the quote itself is only a side issue to the central significance of an enduring oversupply of unoccupied real estate properties (though the impact in our weakened standing with foreign financial markets remains to be felt)…
On the other hand, I still think the utility of artificially reducing these inventories is overstated (as argued by some of the other contributors to this interesting thread). I also think it’s quite accurate that a laissez-faire mentality* set in during the 90’s and that it was elevated to a pseudo-science during the period of GOP majorities in the Congress and that it was enabled by a complacent White House that benefited from the artificial but ephemeral purchasing power created by serial refinancing and other mortgage-based manipulations of assets… but I would certainly agree that there were some Democrats who went along with the charade of inadequate GOP-managed oversight committees and that there were also a few responsible Republicans who joined the larger cohort of Democrats who called for more effective regulation and oversight of financial institutions only to be rebuffed…
… but OK: ’tis the season to be partisan, and yet one cannot state with certainty that a different legislative majority in 2000 or 2002 or 2004 would have stemmed the rotting of the fundamentals more successfully, so I’ll close by simply suggesting that there were many who sounded alarms but that they were treated like the little boy who cried “WOLF!”… when, in fact, the wolves were in charge of PR at the henhouse.
* This mentality went far beyond oversight of financial markets, but that’s a bigger question…
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Fabius Maximus replies: Vacant units in excess of household to occupy them must be either maintained (very costly in terms of capital and annual expense) or destroyed until occupied. These are the only 3 outcomes.
I discuss all three alternatives. Most of the comments suggest an extended stay in fantasyland is the preferred alternative, as none of the three seem to sufficiently pleasant.
While search for the guilty is entertaining, it is irrelevant to solving the problem.
Comment #3 is one of the shorter ones of this thread. I dont think it’s fair to call it overlong, or a waste of cyber space. I was surprised to see “b” at Moon of Alabama take up your idea, and even more surprised that about half of the comments there were favorable. The other half, though, were like mine, wondering why it was more urgent to address the symptom of a problem than its causes.
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Fabius Maximus replies: I do not understand either part of your comment.
“why it was more urgent to address the symptom of a problem than its causes”
The superficial answer: First aid is usually treating the patient to stablize him or her. Symptom or cause, is irrelevant at this stage. Stop the bleeding, start the heart, etc.
Going more deeply: While a sometimes useful analogy, economics is not medicine. There are not symptoms and causes in economics. Results are the result of causes, but are in turn causes of other effects. Don’t let the analogy channel your thinking. Specifically, as I have explained above, excess supply is not a “symptom” in any meaningful sense.
Re yr reply to #8. Yes, probably beyond the scope of this blog, but unfortunately I think only a serious re-think will be of any long-term benefit. Bulldozing housing will not fix the CDS crisis which is geometric orders of magnitude larger than the housing market. Which is why AIG had to be supported yesterday since it is their CDS branch which was causing the problem. I highly recommend Henry Liu’s articles from about a year ago which go into all of this in exhaustive, and truly erudite, detail.
I read one article today that deals with changes of the sort of scope that is required. (This excerpt goes over the limit so just cut it out if you don’t approve of the length.) {snip}
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Fabius Maximus replies:
“Bulldozing housing will not fix the CDS (credit default swap) crisis which is geometric orders of magnitude larger than the housing market”
Nor will bulldozing housing cure my headache from reading this nonsense. I have repeatedly said that the physical oversupply is just one aspect of the housing crisis — which is in turn only one aspect of the overall financial crisis, of which the CDS problem is part. I cannot imagine how you could read my post and imagine I – or any warm-blooded creature — would think that destroying housing units has any relevance to the CDS market. Nor is there anything in my post that would imply this.
As for the 2nd part of your comment. I have bad news for you: the search for a magic bullet to solve all our problems is only for children’s bedtime stories. Economic reform on a vast scale you refer too is irrelevant to my narrowly defined post about the oversupply of housing units.
Also, this comment is not even distantly relevent to my post. By the time such vast economic reform take place the housing crisis will be just a memory. You might as well make a comment about climate cycles or biological evolution of our species. Please at least pretend to follow the comment policy.
I realize I’m wrong: The supply alone really was a huge driver of the rest of the crisis:
5M overcapacity, at $300K/each is $1.5T in needless increase in supply in risky assets. A good cartoon view (as in fat supply/demand curve economist cartoon) from Brad Delong has convinced me as well ( http://delong.typepad.com/sdj/2008/09/understanding-t.html )
I still disagree that house-destruction will have a significant effect however, as we are seeing the same price collapse in areas where you don’t have vacancy issues, but you’re right, it was a disease in its own right, one that we have overlooked.
Apologies.
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Fabius Maximus replies: Of course massive destruction of housing stock would “have a significant effect.” I think you mean — and I agree — it might not be the best course of action.
My point was to focus on the bleak alternatives, including…
(1) maintain the excess homes until needed (either using government $, or allow a BIG decrease in home prices so that speculators will do it).
(2) destory excess houses, or thru inaction allow this to happen (already happening; this is the default option)
(3) create new households to fill them, with increased immigration the easiest method.
Also — no need to apologize. This blog discusses things on the edge of what we know. All we can do is muster the available data and speculate. Everyone is often wrong in this process. As in science, a wrong theory can illuminate the issues.
And I really need to post a disclaimer. I’ve come to the conclusion I’m wrong 90% of the time. (but I might be wrong about that and be wrong 95% of the time).
Although I think 1 is happening rather than 2 in many areas: For a while, the banks were keeping the houses and not churning them very fast. But now it seems that forclosures are the only thing selling.
It really depends on the area.
In the core/suburbs, 1 is happening with a vengence here in the SF bay area: the banks are selling and people are buying. I had a friend buy a condo in concord this way a couple months back. Likewise, another family friend’s daughter just closed on a McMansion in Temecula (her husband works IN Temecula, so its not an exurb commute for them).
EG, in Contra Costa county, which in the bay area core is probably hit the hardest by bubble-up/crash-down (less desirable, more commute, was relatively affordable), sales are actually way up over last year (70% Year-over-year) but median price dropped over 40% year-over-year. The rest of the area sales are down, but only in the single digits Year-over-year, but median price still is taking a beating.
One factor may be effectively a “mark to market” situation combined with a liquidity crunch: If those holding the forclosed houses on the balance sheet have to mark-to-market, you are already taking the loss on paper, so you might as well take the loss in practice and turn it into liquidity.
2 may be inevitable however in the exurbs. EG, the Vegas suburbs, Brentwood/Lodi/Merced/Las Banos etc in the bay area, the antelope valley, temecula in the LA/San Diego area. I don’t know about the east coast, but I suspect some of the DC exurbs are similar candidates. Especially if gas prices spike back up, ~120 mile commutes become a big hit. Not to mention heating/cooling costs on relatively oversized houses which, in CA, are in higher heating/cooling cost areas.
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Fabius Maximus replies: The dynamics of markets are complex and subtle — and local (all markets).
The most fundamental part of the problem was the parsing of risk to fannie and freddie away from the originators of the mortgages. Mortgage brokers/banks/S+Ls sold mortgages, took profits on the sales, then handed off the bad debt. The originators of the mortgages had no risk, and therefore cared not an iota about how unsuitable the borrower was. “If you could fog a mirror, you could get a mortgage”. The design of Fannie and Freddie created the conditions for the eventual bubble and collapse. Is this understood?
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Fabius Maximus replies: The very size of the problem prevents clear diagnosis. Household debt in America has been rising since WWII. This growth accellerated after the 1980-82 recession, and again after the 190-91 recession, and again after the 2001 recession. Bank Credit Analysts’ term for this is the best I have seen: the post-WWII debt supercycle. See “Death of the post-WWII geopolitical regime – death by debt” for details.
Subprime mortgages were just the grain of sand that collapsed the pile, as was (from a larger perspective) the housing bubble. These are aspects of the problem — parts, not the whole.
US households have too much debt. As I explain in “A happy ending to the current economic recession“, there are only four ways to solve this problem: growth, inflation, socialization, and defaults. We were sliding along into a deflationary cycle as debt defaults. Now Paulson seeks to socialize the debt, putting much of it on the national VISA card.
Update: the US Census Departments 3rd Quarter report on vacant housing units
Almost 13% of US housing units are vacant (includes homes, apartments, and condos; both owner-occupied and rentals; does not include second homes). The range was 6% – 10% from 1955 through 2001 — when the housing construction boom began. A return to a 9% vacancy level means aprox 5 1/2 million units either occupied or destroyed.
Since the flow of illegals into America appears to have either slowed or reversed, regular demographics and legal immigration will have to work over many years to absorb these units. Esp as household formation slows during recessions.
And, of course, many vacant units will be destroyed by vandals, nature, and the government.
How about the government focusing on the true cause of the crisis then: housing oversupply? I would ask that the gov not purchase and destroy homes but rather offer deep tax credits and incentives for middle market ownership to stimulate demand. What do you think?
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Fabius Maximus replies: That misunderstands the problem. Housing oversupply means too many vacant housing units. Since almost everybody occupies a unit, incentives mostly just moves people from one unit to another — not increasing the number of units occupied.
This is discussed in greater detail in this very post!
Also, that is not the cause of the crisis. Housing was just the grain of sand which collapsed the pile, the first weak link in the financial structure to collapse under the weight of too much debt. See “A picture of the post-WWII debt supercycle” for a larger perspective on the problem, which is global in reach.