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:

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
Originally published at Fabius Maximus and reproduced here with the author’s permission.

4 Responses to "Destroying houses in order to boost home prices"

  1. Anonymous   December 16, 2008 at 9:48 am

    How about buy and turn into homeless shelters, neighborhood schools, elder and child care centers? It’s easier to tear down, but not necessarily wiser. Since the demand for new homes will eventually return, then retaining the current stock (assuming it’s not allowed to fall into disrepair) makes sense. Tearing down brand new buildings results in a total loss of the investments that went into it – both money and resources – that were involved in creating that building.Heck, even if the Government bought them, then sold lottery tickets – with the prize being one of these homes, until all the homes were gone, we’d be better off than if we simply tore them down. There could be tickets specific to each metro region, and the taxes on the winnings could be designed to encourage people to buy tickets for particularly blighted areas.With such a lottery, the government would likely get the money they spent to purchase the homes (more likely than they are to get anything back from the bailout), while neighborhoods and local government would benefit from the stemming of the blight.

  2. RedDevil   December 16, 2008 at 11:28 am

    I will agree that there is excess supply of new homes, but this is primarily determined by households’ and lenders’ (reasonable) unwillingness to pay the fictional values of housing stock. There is a fundamental difference between the need to destroy the capital values of housing to increase demand and a destructive desire to destroy bricks and mortar to reduce supply. The best solution to satisfy real housing need would be concerted efforts to enable both the downward adjustment of house prices and government action to write-off household debt through principal-reduction. This would positively mitigate debt deflation and allow derelict homes to be purchased for demolition.

  3. Guest   December 16, 2008 at 5:44 pm

    How about letting real estate prices fall until the market clears. It will create a lesson in risk management that will last for many generations. And it will also address economic imbalances.Yes, I know this view is out of fashion because it will knock out the many insolvent banks, but nationalization of these institutions will be a cheaper solution at this point. And yes, there will be collateral damage from the economic pain that will follow a market correction, but no less than current bail out policies, albeit in a more concentrated time frame. Policies should focus on driving credit to vital segments of the economy, such as small businesses and other factors of productivity, rather than bailing out those who contributed to the economic fiasco. This won’t happen of course, but as long as we a dreaming…

  4. Guest   December 16, 2008 at 11:17 pm

    There is an oversupply of nearly everything in America (homes, cars, food, electronics, etc) and yet still so many things remain absurdly overpriced…this is why deflation MUST occur.The supply/demand cycle has become totally out-of-whack.