Destroying houses in order to boost home prices

 Summary:  an economist joins FM in suggests that homes might be destroyed in order to stabilize home prices.  Inaction means that market forces — abandonment — will result in this harsh solution, but in an irrational and unnecessarily damaging way.  Of course, Americans of our time rely on hope and folly as our preferred solutions.

In A vital but widely misunderstood aspect of our financial crisis (18 September 2008) I wrote about the core of the housing problem:

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%.

… 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).

Judging from the comments, many readers reacted with outrage.  Hope is so much more emotionally satisfying than facts or logic.  Now three months later home prices continue to decline and developers continue to build — increasing the supply of vacant homes (but now very slowly, as construction slows).  And more people consider extreme solutions.

Two were cited in “Knocking down houses in order to save the village” on 20 October.  Such as economist David Rosenberg, who wrote on 2 December 2008:

The government has to either …

  1. Declare a moratorium on single family housing starts for the next two years – the builders, amazingly enough, are still adding to stock of single-family homes at a rate that exceeds underlying home sales by nearly 25%. Or,
  2. Create regional landbanks, ring fence the unsold inventory, and destroy it.

Nothing they are doing is going to stop home prices from going down until they treat it as an excess supply problem. There are 18.6 million vacant housing units in the USA today – a 14% overall vacancy, which is unprecedented. The pre-bubble norm was 10-11%. So, what this means is that in aggregate, we have an excess of nearly 4 million housing units overhanging the real estate market (this is both rental and homeownership but keep in mind that they compete with each other and with a near-10% vacancy rate alone in the rental sector, there is plenty of choice at likely attractive rents for people to choose from as they increasingly see real estate as shelter as opposed to an investment).

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  Per the FM site’s Comment Policy, 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).

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Other posts about the housing crisis:

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  3. Destroying houses in order to boost home prices, 16 December 2008
  4. The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009
  5. Another step to solving the housing crisis: downsize cities by destroying neighborhoods, 2 April 2009

Post on the FM site about diagnosis, causes, and the larger context of the crisis:

  1. 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.
  2. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  3. 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.
  4. Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
  5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  6. A picture of the post-WWII debt supercycle, 26 September 2008
  7. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  8. Causes of the financial crisis (no, its not the usual list), 29 October 2008
  9. Government policy errors and the Great Depession, 1 November 2008

42 thoughts on “Destroying houses in order to boost home prices

  1. Been there, done that.

    You advocated the destruction of existing housing stock some months ago. It was a bad idea then, and it’s a bad idea now. This is the equivalent of paying farmers not to plant crops (to fluff up ag commodity prices), paying autoworkers not to work (to fluff up worker income), and buying milk from dairy farmers to pour it down the drain (to fluff up milk prices).

    If capitalism can’t keep going without this kind of insanity, it’s time to give socialism another look.
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    Fabius Maximus replies: It is nothing like “paying farmers not to plant crops.” Here we have another example of “not understanding the point of the article.”

  2. What about the homeless? Wouldn’t giving the houses to those that lack be a more hopey/change approach?
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    Fabius Maximus replies: Any how will they maintain it? Also, considering the large fraction of the homesless suffering from “substance abuse” or mental illness, I suggest you check with your neightbors before floating this proposal for the house next door.

    Why not give every poor person a home? Esp when lenders are returning to traditional standards of big downpayments and ample payment/income ratios! Why should Americans bother to save at all, when the government can be the source of all good things?

  3. Since owning a home has become the American Dream that is viewed as not impossible to achieve, contractors have gotten away from building to the minimum requirements for decent housing infavor of building homes that are most desirable. The public needs to get back to the basics and learn that small homes that meet the requirements of a decent standard of living can be the best investment for new home owners. But, contractors need to build quality into small homes so that they may be easily maintained over the long haul. There is also a need to educate young families along the lines of purchasing adequate housing that stays within a 25% of take home pay in monthly payments so that they can maintain a decent standard of living in their purchase of the basics of life. Public school systems do not do enough to educate children along the line of moderate living. This needs to change.

  4. better would be to dispose of them by lottery – a $10 ticket would get you a 1 in 10,000 chance to win… proceeds to the builders.

  5. As the recession begins to really take hold, we can expect that typical household size will begin to increase once again – reversing a decades long trend in the other direction. Calculated Risk discussed this: “Housing Starts and Demographics“, Calculated Risk, 13 September 2007. This will further exacerbate the oversupply problem.

    Politically, I can’t imagine anyone will ever be able to advocate bulldozing housing. What could happen is de facto destruction of the oversupply through rules that condemn abandoned properties, condemnation and removal of unsafe buildings, “enterprise zones” to clear for future development, etc.
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    Fabius Maximus replies: Agreed, demographic forces could make the oversupply larger during the recession.

    As for paragraph II, please re-read the post. What you describe is exactly what I said.

  6. Your post regarding destroying homes to stablize prices is intriguing, and seems practical. However, as always, “the devil is in the details.” How would a government-run program select homes to be destroyed? Would this process be gerrymandered by our Congressional representatives, and divided up on the basis of political clout, favors-owed, or similar? At first glance, I see no way to make the process fair, something that will certainly be a factor among voters. Such a program would have to be done at the local level, to distribute the benefits of the program evenly on the basis of geography. If you destroy homes in Detroit, it will not necessarily help housing prices in Atlanta, not quickly anyway.

    The other problem with this idea is that it punishes those who played it straight, and did not game the system by taking on unsound debt, over-extending themselves, or by enacting get-rich schemes based on the housing market. The real estate developer who bet on ever-rising home prices gets bailed out, and those homeowners scrimping and saving for a down payment get shafted. Rising and falling prices are the means by which our system transmits consequences – good or bad – to individuals, inevstors and institutions. Short-circuiting that system rewards irresponsible behavior at the expense of those who played by the rules and didn’t treat the housing market like a high-stakes casino.

    Strictly on a personal basis, I would not support a program that paid anything like market value for distressed real estate – the homes to be destroyed. Investors who rolled the dice and lost can’t be allowed to get off free of consequences. The goal should be to revitalize the housing market, not save individual investors or investment institutions.

    As for your idea that an influx of illegal alien immigrants from Mexico or elsewhere is going to stablize the housing market… well, that’s throwing good money after bad. Said immigrants might indeed prop up the RE sector some, but will shift costs to the health care, social services, and other sectors.

    You may well be right that doing nothing will be costly also… as urban blight areas show.

  7. The problem with the U.S. housing market is not merely that it is overbuilt, but that it is improperly built, with too few homes affordable to middle-class families, and too many “McMansions” – or this at least appears to be the case in suburban Chicago.

    It is quite possible that there is pent-up demand for affordable housing, the kind that young couples, retirees and the like, can afford.

  8. Why can one not argue in favour of home destruction? If the policy of US politicians have been to support home-ownership by relaxing regulations etc. to the extend that households without the needed strength found themselves owning homes. Alternatively too large homes.

    The folly of that policy is shown now by the massive numbers of foreclosures when weak household economies collapse. Home-ownership should be a sign of a strong household economy. It’s not a right.

    If you artificially can inflate the number of houses with poor policies. Where is the problem of deflating the house numbers with bulldozers. The key here is price stability on the house market only a much lower level of houses for sale can bring that stability.

  9. When demand can’t match supply, prices should go down. That is the way a market economy is supposed to function. It is actually the very basics. If house prices fall low enough, there will be buyers. No doubt about this (except if the neighboorhood is so bad and the cost of maintaining the house so high that no one would buy it even for a dollar. In that case you could make a case for razing it).

    If the prices set at market-clearing levels, housing will become affordable again for average households without incurring excessive debt (no need to bring drug addicts into this!) This will free their cash for more productive investments.
    I fail to see the problem with that, except that some overextended borrowers will default (as they should) and some unwise lenders will lose money (as they should also). Why should people who make bad decisions be protected from the consequences?

    The alternative you are promoting could be extended to any market: let the government fix the price that suits some people best (which ones? answer: presumably the well-connected) and, given the level of demand at this price, let the the government determine the level of supply that clears the market and destroy any excess supply.

    This could also serve to save GM: let the governement seize and destroy any car that is more than 5 years old; people whose cars will be seized will have to buy new ones and GM will thrive again.

    But then again (and this brings us back to comment n°1) this type of economic policy has already been tried: it’s called a centrally planned economy and it didn’t work too well last time.

  10. Why not give them to the homeless, soon-to-be homeless or newly homeless? I know FM wasn’t a fan of that (from above) but if we can structure a demolition program, we can structure a “resettlement” program.

    1. Set up a land bank or proprety pool to gather up the properties and establish some sort of maintenance or monitoring program. Lot’s of make-work jobs here.

    2. Set up a program where families (and it must be family units, even multiple families) apply for property.

    3. The program would cede two properties in an subdivision (preferably side by side or close). The program requires that one property be used as a residence and the other property be torn down or dismantled by the applicant’s family or group. They are allowed rights to the money generated by the salvage. The family gets the property rent-free and tax-free for six-months, then must start paying on a 40 year note and conditional title (see note 4). Property taxes are reset lower but the owners are responsible for them.

    4. On the now-vacant lot it would be required that at least “x” thousands of calories of food to be grown on that land via intensive ag over a 5 year period. At the end of the 5 year period if the applicants have kept up with the payments and taxes and have grown the required food, they get title to the property.

    Something like this allows for better utilization of existing housing stock (huge houses for small numbers now converted to huge houses with lot’s more residents), it allows for a rebuild of local ag (going to be very important as petroleum becomes much more dear in the coming decade – see the receent EIA report on depletion assumptions) and, most importantly, it allows for those currently with no hope being offered by the System to re-engage and have a chance to build up capital and property.
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    Fabius Maximus replies: Before writing such things, perhaps you should donate time to actually help (and meet) the homeless in your area. Also, read some research about the problem. Then you can speculate about solutions.

    Also, how much food can be grown — and with what degree of effort — on the average home lot? My wife has a “green thumb”. After years of observing (and eating the product) I can state the answers are “not much” and “a great deal.”

  11. To Billaud-Varenne
    But you have already involved the state in the first place. Their policies of home-ownership helped create the bubble in the first place, why not have the state clean up their share of the mess? The market-clearing levels have been skewed by government involvement so unskewe them.

    You mentioned “some overextended borrowers” that could well be a rather large share of total US households. If one looks through some of FM’s posts on US debt I wouldn’t be so optimistic as to just use the word “some”.
    Secondly your average households are not so easy to identify due to the substantial income inequality in US society. IIRC home-ownership reached 67-69% prior to the bubble busting. How many of those households would qualify to be the term “average”?

  12. FM Comment about this thread

    How many of the folks posting comments have read the post, or are replying to just the title?

    Vacant homes get destroyed, one way or another. Areas with net out-migration (e.g., today in Detroit and California’s Inland Valley) have a higher fraction of vacant homes, which have a destabilizing effect on their communities. The question is how to deal with these dynamics.

    One of the first posts on this site discussed housing: Diagnosing the eagle, chapter I — the housing bust, 6 December 2007. Perhaps the most important post — because dealing with the least understood aspect — was A vital but widely misunderstood aspect of our financial crisis, 18 September 2008.

    Today housing starts fell to a record low — by far the lowest since 1959, probably the lowest since housing construction re-started after after WWII. See Calculated Risk.

  13. A strong anti-drug warrior, or an active neighborhood watch member, may want the homes bulldozed for non-economic reasons. Abandoned buildings often contribute to urban crime. They serve as hide-outs, RPs and short-term residences for people who would rather not be prominent on the grid when Occifer Friendly rides around in his cute little Happy-Mobile…

  14. Do not destroy any homes. We will need them for all the refugees from Iraq and Afghanistan that we will admit after we pull our troops out.

  15. As the owner of an older home, I cringe at the thought of destroying buildings. However, the idea of removing excess inventory during a period of over-supply makes much sense. In many cases, throughout the US (and Europe), entire neighborhoods have been destroyed and rebuilt over time. The concept isn’t new, and given the Treasury’s recent appetite for buying bad assets from banks, the thought of buying vacant homes is within the same realm. I think this is a viable option to the Democrats call to aid troubled homeowners. Rather than handing out cash to distressed owners, remove the excess inventory levels throughout the US to raise regional market values for all homeowners. Thus avoiding another bailout for bad decision-makers.

  16. Destroying housing stock bring supply into line with demand was done on a large scale in order to bring the world’s economy out of the last great depression. It worked great – the depression did end. Here’s what happened: the important world governments contracted with the big aircraft firms of the time to create a then-new method of demolition. The German government took the lead — in contracts let to several firms with unused capacity, notably Heinkel and Junkers, these housing-stock demolition aircraft were purchased and used, first against Polish buildings, but later with greater effect in Rotterdam, London and Coventry. Fortunately, other governments soon caught up with this German innovation. The USA’s Boeing, in particular, produced the most efficient of these engines of creative destruction.
    This method works on many levels. The aircraft firms get the government contracts and the resulting economic stimulus, the residents of the demolished houses have a whole host of new demands, thereby lifting their economy. Heck, even the stick-in-the-muds who disagree with this method of demolition, like the residents of Nuremberg, increased demand for technology advancement and night-flying skills.

  17. FM, an interesting suggestion. While you did mention that abandoned homes – particularly in urban areas – can lead to blight, you did not mention the (apparent) cycle of gentrification. Nice description (although not terribly infomative) at Wikipedia.

    It could be the current economic swing will drive another round of gentrification in many urban areas. Then again, maybe not.
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    Fabius Maximus replies: Great point! Although it would be gentrification in a different form: housing destruction in the exurbs, as people move inward. That might be a net plus to society!

  18. @Comment 11, FM replies: “Before writing such things, perhaps you should donate time to actually help (and meet) the homeless in your area. Also, read some research about the problem. Then you can speculate about solutions.

    Answer: Worked two and 1/2 years volunteering weekends and night at local shelters several years back. Familiar with the issues. That’s why I specifically limited my suggestion to family groups. I wasn’t being flip. I am fearing a huge surge in homelessness, though, by groups not fitting the standard profile. New demand meeting existing supply – seemed like at least an option to consider…

    Also, how much food can be grown — and with what degree of effort — on the average home lot? My wife has a “green thumb”. After years of observing (and eating the product) I can state the answers are “not much” and “a great deal.”

    Answer: Not enough for self-sufficiency. Using permaculture techniques, raised beds, vertical farming (i.e. “Gardening by the Yard”), etc. can increase production – sometimes dramatically. This part was meant to place an emphasis on making productive effort part of the bargain for the land. Plus, we still get to feed your appetite for destruction of housing stock by tearing a portion of it down.
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    Fabius Maximus replies: You made some good points. My apologies, I missed your reference to family units (there had been several previous comments about this).

    (1) The cost of shelter will probably decrease as the excess supply becomes more evident, excess meaning vacant units (now far above previous peaks as % units).
    (2) I too worry about an increase in poverty. But the standard welfare methods are IMO better than gifting large valuable assets to the poor, while working families struggle to pay their mortgages.
    (3) The effort to grow food in small lots is absurdly high compared to more useful ways to employ labor. When Keynes spoke of burying money and digging it up, it was a metaphor. Not advice.

  19. “The question is how to deal with these dynamics.”

    And why, exactly, is letting the price fall to the point where someone moves into these homes and they don’t become vacant in the first place not an acceptable answer?
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    Fabius Maximus replies: In what way is this incompatable with my post?

  20. If housing prices went down sufficiently, perhaps zillions of hard-working getting-nowhere working families could afford a decent home in a well laid out neighbourhood.

    Propping up inflated prices to save banks and developers seems like too much of a top-down approach; though appealing on the idea level it further devalues the nation’s prime national resource that ultimately will pull the country through again: her people.

    It is time for more people-oriented versus system-oriented analysis.

    Furthermore, deep recessions/pullbacks like this allow ‘the system’ to purge itself of excesses, including corruption. Overall, a good thing.
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    Fabius Maximus replies: Where does my post mention “propping up prices?”

    “Furthermore, deep recessions/pullbacks like this allow ‘the system’ to purge itself of excesses, including corruption. Overall, a good thing.”

    Also, nice to see you channeling Andrew Mellon. Hi, Andrew! Nice to see you sticking with your views, but disappointing to see that you have no new ideas 75 years after your failure as Secretary of the Treasury.

    President Hoover wrote in his Memoirs that Mellon, as Secretary of the Treasury, had

    … only one formula: liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate…. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.

  21. Re Kevin Morrow’s post : the off-market housing stock , 10-15 years later , provided a place for children ( like me )to run wild ,among the broken walls and forests of willowherb . We suffered more gravel rash than obesity .
    Maybe the San Andreas Fault or Yellowstone volcano will do the job for you ?
    Or how about reducing all tall buildings to a maximum of 3 stories ?
    The death toll at the World Trade Centre Twin Bungalows would only have been about 75 , hardly worth 2 days headlines .

  22. FM. Yr post does not mention ‘propping up prices’. But you do suggest destroying excess housing to take it off the market and thereby protect property values and with it the banking sector, current owners, neighbourhoods etc. No?

    A similar sort of solution could be:
    ” By executive order of the USG as approved by Congress all housing prices throughout the US are hereby declared to be worth 50% of their appraised value on Jan 1 2008 and all documents pertaining thereto, including mortgage notes etc. are hereby adjusted accordingly universally such that the principal balances references shall not exceed the new market value of the properties. Houses vacant for more than 6 months are eligible for destruction at which point developers will receive compensation of net cost of such development. Banks can write off the difference without penalty to their reserve requirements.’

    Re Mellon: I do not advocate letting it all go down, rather the top-heavy financial casinos which are mainly criminal anyway.

    The solution to most of the current ills is simply to bring wages back in line to what they were fifty years ago when one person could support a family with a decent full-time job.

    Interesting questions about current economic situation:
    * “Credit crunch? What credit crunch? report says“, Forbes, 11 December 2008.
    * “Credit crunch? What credit crunch?“, Reuters, 11 December 2008
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    Fabius Maximus replies: Seldom has so much folly been packed into so few words.

    (1) No, I said — several times — that vacant units get destroyed as a natural process, and that we should get control of the process.

    (2) Why not just have the government declare that everybody is rich? That has as much chance of success as anything in the long history of government setting prices at non-market levels.

    (3) The report by Celent (not available to the public, summary here) will probably wind up in the dustbin with the many many other reports written during the past three years explaining why housing prices could not crash, there was no crisis, and certainly will be no recession. That they are still being written — and taken seriously by some folks — is tribute to the fact that intelligent life has yet to evolve on Earth. The global economy is going off a cliff, as shown by a wide range of metrics; there is no point in bothering with such nonsense.

  23. Don’t burn em down. Pay workers to dismantle them and sell the material back into the supply chain. Lumber is lumber. Ship it to China where they need houses. We get jobs, they get lumber, win/win.

  24. Re: (2) Why not just have the government declare that everybody is rich? That has as much chance of success as anything in the long history of government setting prices at non-market levels.

    I think that’s a good idea. Not by declaration but by
    a) guaranteed individual income based on
    b) share of national GNP calculated properly.

    Many studies/proposals have been made along these lines for over a century, although I doubt they are able to pack as much ‘folly’ as I in so few sentences! This ‘condensity’ I attribute to your excellent 250-word discipline for which I thank you heartily!

  25. PS. A certain irony in hammering on someone whose moniker here is ‘Erasmus’ for ‘folly’ when the latter is perhaps most well known for his seminal philosophical work: ‘In Praise of Folly’.

  26. Re comment 3: I was not clear. What I found interesting is that the data used for the report is purported to be mainly from the USG’s own figures, such as:
    * Overall lending by US banks is at a record high and has increased during the credit crisis.
    * Interbank lending is at record highs and has increased during the credit crisis.
    * Consumer credit is at record highs and has increased during the credit crisis.
    * Commercial paper markets are operating within their historical norms.
    * Lending by banks to businesses is at record highs and has been growing rapidly.
    * Municipal bond markets are operating within their historical norms.
    * Deposits at banks have shown a substantial increase since the start of the credit crisis.

    Of course, they might be drawing very poor conclusions, but this data on the face of it is surprising and probably worth further explanation. We have heard a lot about the ‘credit crunch’ lately, but how do these figures (assuming they are accurate) fit in with that? It is not impossible, you know, that the markets are being ‘gamed’, just like the lead-in to the Iraqi war.
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    Fabius Maximus replies: The conclusions are moronic. The first effect of deleveraging is increased leverage. Asset values drop, economic activity slows, and people borrow to keep their businesses and families afloat. To do so they draw upon pre-existing credit lines. This increases aggregate lending.

    Note that drawing on all available sources of credit is also common pre-bankruptcy action.

    Financial institutions react by …
    (1) not approving new loans or buying newly issued bonds, or
    (2) withdrawing credit lines (where possible), or not rolling them over at maturity.

    Both of these take time to show in the aggregate data. The first evidence of this was banks reducing Home Equity Lines of Credit (HELOCs). Then reports appeared of banks not rolling over business credit lines. There are indications that widespread reductions in credit card borrowing limits will happen early next year.

    All of these have received much attention in the media. Indeed it requires a high degree of blindness not to have seen these; but that too has been characteristic of this downcycle.

  27. This post is absurd.

    Builders will stop building when they can no longer profit. They don’t want to stop yet because they think they can still make money, and indeed they can in some areas.

    Housing prices are already reaching levels at which housing is becoming affordable. An entire new generation of real estate entrepreneurs is being created now, and they are figuring out ways to take advantage of these bargains in ways you and I can’t imagine. They will figure out a way to finance their acquisitions and rent out these properties at what the market will bear.

    Somehow you think that by interfering the all-knowing federal government will make things “better” or “easier” or the landing “softer.” What is the evidence for this? So far, all the feds have done is encouraged me to go delinquent on my mortgage so I can get the sweet refi deal.
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    Fabius Maximus replies: It seems you did not understand the post; I suggest re-reading it.

    As to why builders are still building: Rule one for businesspeople: “Ignore sunk costs.”

    One entertaining aspect of posts about this recession, a constant over the past year, is the folks displaying faith but little understanding of this business cycle. Always quite funny in retrospect, as I suspect this will prove to be.

  28. Why stop with houses? Why not buy and destroy SUVs that Detroit can not sell?
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    Fabius Maximus replies: Unwanted cars (the equivalent of vacant homes) are destroyed. Do you believe that people keep them as treasures, perhaps bronzed like their children’s first shoes?

  29. Wow, I thought that with the new comment policy I was safe ;)

    OK, so how does propping up housing prices (which destruction would do) help those getting laid off? The rational thing to do if you are being hurt by the bad economy is move, downsize, and cut expenses.

    If housing becomes more affordable due to oversupply, doesn’t that have a similar effect to increasing demand through government throwing stimulus packages at the problem? (e.g., more disposable income for the individual.)
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    Fabius Maximus replies: OK, I give up. How does propping up housing prices do all those wonderful things? Esp as home prices will reach an equilibrium largely based on people’s income and wealth — with housing supply (in units) affected by those things more than vice versa.

    As for your last point, how many vacant homes in your community must there be to get you to buy a 2nd house to live in? Perhaps putting the dog and kids in it? {Hint: vacant homes become used homes due to demographics and household formation. Your divorce will increase the number of housing units occupied by your family, but housing affordability does not. Affordability affects household formation to a minor extent, but mostly affects which housing units are occupied.}

  30. Occupancy is more flexible than the articles assume, like all that “ohana” housing in Hawaii. Or those slacker 20-somethings who need to stop sponging off their parents.

    Moreover, “owner-occupied” and “rentals” are actually pretty fungible, which these articles ignore. This is how many RE professionals get their start–move out of their house (downsize OR upgrade) and rent it out. Low-cost rentals are pretty much always in demand.

    As people desert the “McMansions” for lower-cost alternatives, some owners will turn to the UK model, when manor houses were cut up into flats because their owners couldn’t afford the taxes.
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    Fabius Maximus replies: I do not understand what you are saying. The key point I have consistently made is that the key is to watch the supply of housing units and their utilization (fraction of units vacant). This ignores the difference between owner-occupied and rentals, which is a secondary factor.

    Sub-dividing large units will increase the supply of units, increasing the overall surplus. I agree it is likely as a recession increases the demand for cheaper units. Another way to express this is in terms of housing demand in terms of both units and square feet. People down-size by moving to smaller units — which does not change the number of vacant units — but increases the number of vacant area.

  31. FM, the articles say almost 3% owner-occupied (I guess they’re designed to be owner-occupied, because they are really not occupied by an owner and not classified as investment property) and 14% overall vacancy rates, which seems to indicate a lot of slack between the two. So is 3% too high? The rental market tolerates a lot higher.

    Your point is, who’s going to live in them?

    Well, I wonder how much pent-up demand there is for affordable housing, especially in places where people have stayed in extended family or group arrangements because housing prices have persistently been so high (e.g., California, many urban areas). Not to mention 750,000 homeless (http://www.hud.gov/news/speeches/2008-06-26.cfm)

    All I’m saying is that the numbers of people needing to be housed may not be as inflexible as the articles suggest. If prices fall we may see moving, if not the kids and dog, maybe the Dad into a condo close to his M-F job, which he used to have to commute 3 hours round-trip previously.

    The federal bureaus tend to ignore the fact that people change their behavior when prices change. I just suspect we won’t see as many ghost neighborhoods as you and Rosenberg expect.
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    Fabius Maximus replies: Any examples of experts in “federal bureaus {who} tend to ignore the fact that people change their behavior when prices change”?

    (2) HUD Secretary Preston’s speech also says “There are still about 155,000 chronically homeless people living on the streets.” That is, there are 155 thousand homeless people in the sense most people use that word. Such numbers (like the number of rapes, depressed or mentally ill people, and hungrey children) get grossly exaggerated by broadening the definitions.

    Also, few things are inflexible, nor did I say any such thing. However the number of households usually decreases during recessions, not increase as you hope. I doubt that the worst recession since the 1930’s will be exception to this pattern.

    (3) Your analysis of the home vacancy numbers is absurd. There are multiple categories, and picking a number or two out of the mix tells us nothing. Each must be compared to its historical ranges. For example, the 2.9% owner-occupied vacant rate is aprox 1/2 above its previous peaks in the long record.

  32. The CBO is famous for ignoring supply-side effects on revenues in its arguments with OMB. Dept of Agriculture is famously (perhaps intentionally?) behind the curve in price-support policies.

    OK, if units are not intended as “owner occupied,” then they are intended as something else–rentals, mother-in-law, or public housing, etc. The difference between the non-owner occupied categories is the amount of rent charged and who the owner is (government or private party). Even the census report treats the categories in the way that if it’s not owner-occupied, it’s a rental.

    You say, “2.8% of owner-occupied units (i.e., not rentals) are vacant, almost 2x the historical average of 1.5%.” This sounds like an iron-clad fact, and that those owner-non-occupied units would not be converted to rentals if an owner-occupier can’t be found. It’s hardly meaningless to say there is not significant elasticity between the two general categories. And rentals, whether they are houses or apartments, can and do tolerate a higher vacancy rate.

    Your point #2 is significant. If this is indeed the Great Depression II, you could be right and find people consolidating households. On the other hand, you may be underestimating the demand for larger area (i.e. rental housing) that could be found at an affordable price if prices are allowed to fall naturally. Whereto else would those extended “depression families.” move? Into two-bedroom apartments? Thus the brunt of the vacancy would be felt be the apartment owners rather than the neighborhoods of single family houses.

    Perhaps the government could then destroy the public housing projects and simply sign rental agreements for single family homes at reasonable rates, integrating low-income families into communities rather than ghetto-izing them?

    OK, so I take it back. Your post is reasonable, destruction is worth considering. But let’s exhaust the alternatives before we, the taxpayers, buy and bulldoze neighborhoods.
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    Fabius Maximus replies: Congratulations! You have misinterpreted what I said and the census data in every detail.

  33. Update: more evidence showing that the primary housing problem is an oversupply of homes

    * “Housing downturn hits L.A.-area rents“, LA Times, 8 January 2008 — “Overbuilding and foreclosures add to supply of units as the recession limits what people can pay.”
    * “The Residential Rental Market“, Calculated Risk, 9 January 2009

    These confirm my analysis, going back to December 2007, that we have too many homes — an intractable problem for such a long-lived, immobile, and expensive capital asset. The oversupply drives down prices through several channels — both in direct selling pressure and forcing down rents.

    The recession makes this worse, as noted in the Calculated Risk article, as the number of households decreases during hard times. People move in with other family members and immigrants return home.

  34. Update: more evidence of an oversupply of home (residential units)

    Until this excess supply is absorbed or destroyed, home prices will remain under pressure. See “Apartment-Complex Developers Falling Behind On Loan Payments”, Dow Jones News, 12 January 2009 — Excerpt from Calculated Risk:

    The rapid reversal of fortunes in commercial real estate is taking down yet another sector: multifamily housing.

    … While sharp declines in retail and office sectors of commercial real estate have commanded attention in recent months, some analysts say deterioration in the multifamily sector is quickly catching up. … Much of the multifamily sector’s problems center around troubles in converting apartments to condominiums, as is the case in Miami, or the challenges in converting rent-controlled units to market-rate apartments, as in Manhattan.

    In Florida, California, Arizona and Nevada, the flood of unsold condominiums is entering the apartment market and the excess supply is lowering rents in those areas, Barclays Capital analysts say. That’s resulted in lower revenues for owners, which in some cases is making it more difficult to keep up with mortgage payments.

    … In November, the delinquency rate on securitized loans to apartment and condominium properties rose to 1.9%, a dramatic jump from the 0.9% at the start of the year, according to Realpoint LLC …

  35. Update: as the number of households drops, the over-supply of housing units grows

    Job Losses, Credit Market Conditions Challenge The Apartment Sector“, National Multi Housing Council (NMHC), 15 January 2009 — Results of their January 2009 Quarterly Survey. Excerpt (bold emphasis added):

    Once again, apartment firms are facing tough market conditions not of their making,” noted Mark Obrinsky, NMHC’s Chief Economist. “Earlier in the decade the bubble-induced rise in homeownership eroded apartment demand; now the economic and financial collapse caused by the bursting of that bubble is taking a toll.”

    “The long-term prospects for the sector are strong,” explained Obrinsky. “The number of people between 20-34 years of age is rising rapidly, and as they enter the rental market, demand will rise correspondingly. For now, though, that demographic advantage is being trumped by the worsening job market, which is leading more people to move back in with family or take on roommates to save on housing costs.

  36. I say, issue 3 million greencards to skilled immigrants from all over the world. They will not only occupy the rental units and buy up vacant homes, but they will also start paying taxes and boost the social security shortfall. They will buy cars, etc. stimulating consumer demand.

    But the key is that they be SKILLED immigrants. Not unskilled laborers from Mexico, but skilled white-collar people from India and China.
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    Fabius Maximus replies: You must see yourself as someone with whom these immigrants will not compete, forcing your wages way down. Folks whose jobs will be affected might not consider your plan so wonderful.

  37. I can’t believe how insane you people are. The time effort and money has already been spent to build these homes. You want to destroy them so your own house, which you made a horrible decision in buying, will rise in value? This is the most selfish thing I have heard. Furthermore, why spend any money destroying homes? Bulldozer rentals, fuel, cleanup.. it will be very expensive. This is akin to when the government destroyed food crops in the 30’s, when there were people starving in the streets. There really is an answer people. Austrian economics. Stop this endless convolution. Wake up.
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    Fabius Maximus replies: How nice. Which job did you volunteer for? To move someplace without jobs (occupying a vacant home)? Like Flint MI or California’s Central Valley? Or to provide free guard service on some speculator’s empty homes? Otherwise they get trashed.

    Or are you some uber-genius central planner, as yet unknown? Quick — go to Flint and give the Mayor your easy 10-step solution!

    “In disbelief” is my reaction to your comment! However, at some point you were bound to learn that mistakes often have unpleasant consequences — such as building more units than can be absorbed. BTW, I have updated the For More Information section at the end of the post, with more articles about the housing crisis.

  38. Update: As usual during recessions, the rate of new household formation crashes

    Fewer New Households Formed in Recession“, Washington Post, 10 July 2009 — Important, as decreased formation of new homes depresses home prices. Excerpt:

    The number of people setting up their own households has fallen to some of the lowest levels in a generation, a trend that threatens to prolong the recession.

    … Government data suggest that the recession has helped push down household formation. Between March 2007 and March 2008, the number of new households — which is defined as any group of people sharing living arrangements — grew by 772,000, to a total of 116.8 million, compared with an increase of 1.63 million a year earlier, Census Bureau data show.

    Household formation rates could keep falling, said Richard Moody, chief economist for Forward Capital, a real estate investment and research company, because of the strong correlation between job loss and household formation. With unemployment not expected to peak until next year, “a lot of that isn’t reflected yet” in the data, he said.

    … Household formation rates are also key to clearing the excess housing inventory, which is dragging down home prices and prolonging the housing slump. The authors of a study released in June by Harvard University’s Joint Center for Housing Studies concluded that the glut of roughly 1.5 million new homes created by years of overbuilding during the housing boom would be gone by now if household formation rates had not fallen below historic levels.

    Demographers and housing experts attribute the drop in household formations to millions of individual decisions to forgo immigrating to the United States, to put off a move, or to bunk with friends and family for a while.

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