Yesterday CNBC decided to seriously discuss an idea we’ve joked about for the past few years– bulldozing excess supply. Erin discusses this with Rick Santelli and Joe LaVorgna, chief economist with Deutsche Bank: [Hat tip ZeroHedge]
I find it interesting that LaVorgna says that he’d have liked the idea a couple of years ago, but doesn’t really think it’s necessary now that housing has bottomed and things are turning around. Here’s what he actually said in 2009:
The momentum in the economy is moving forward. We are much closer to a housing bottom than many believe.
It’s not surprising that LaVorgna didn’t like Santelli’s idea to have the owner of record pay for the bulldozing, given that more often than not, the owner of record is the lender. LaVorgna would have the government pay for this service, which would of course greatly benefit lenders.
It’s hard to believe that anyone would seriously consider this proposal. While “nuisance homes” are bulldozed all the time, typically these are properties that have no real value as residences. Many of these vacant homes out there are not lacking in value, but lenders don’t want to let them go and fire sale prices. Steep discounts hurt the value of their portfolios, and tend to drive down the values of surrounding properties. Deutsche Bank would undoubtedly approve of a program where the government buys properties from lenders at full value, then bulldozes them.
There’s another way to get rid of this excess inventory. If prices are allowed to fall to affordable levels, people will be more inclined to buy them.
Winston Churchill once said that Americans could be counted on to do the right thing, after they have exhausted all other possibilities. I doubt he was thinking of how the U.S. manages its housing market at the time he said it, but it certainly seems to fit.
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Say what? “… the shadow inventory doesn’t exist …”
Hey Twist, great post on this “never ending” subject. I think had the government not wasted all the money on the homebuyer tax credit, it could have purchased 1M homes, knocked them down, and then sold off the lots when the market returned. They would have recouped a significant portion of their investment (assuming they were smart enough to purchase older inventory) over time and supply and demand would have been restored by now. I’m not writing off bull dozing as an “best fit” solution. Dropping prices will do nothing to the balance of inventory. Moving renters to home buyers will just move the vacancy to the rental side of the market. It takes more population to consume our glut, doesn’t it?
Incorrect Joe – you’re leaving out the element of household formation. How many people are living with their parents (or kids, or siblings, etc.) because housing is too expensive? A lot. And how many people would buy a second home if they could afford it? To suggest that price has no effect on housing consumption is obviously false at both a common sense and economic theory level.
It’s a dumb idea because bulldozing a home causes a write off in one person’s account, even if it supposedly helps local prices (and it is debatable it would have much impact at all). Destroying value, even if a low value, is still destroying value; it’s just spread among shareholders and investors, as well as the future value of productive labour, instead of the local builder and planning commission. I would hope someone with a 10,000 foot view realizes this. Obviously CNBC isn’t ever given clearance to fly that high.
The issue may be largely a local one. Here in parts of Florida our mutant property tax system, subsidized windstorm insurance and the bubble market allowed many older properties to remain standing and occupied, often in the middle of neighborhoods that were transitioning to much higher quality housing. Thus, between what folks would dismissively call McMansions, sat many a collapsing 1950s or earlier shack with unsafe windows, an unkempt yard and deteriorating roof. During the bubble they were often called “teardowns”, but many sat with absurdly low, frozen property tax rates and State provided insurance. The owners simply could not move to a home of even lesser value and pay the new property tax rates and insurance. Even the much discussed “portability” of those shameful tax discounts didn’t change the reality much.
Now, under the same mutant property tax system, those below normal taxes still go up for the former beneficiaries of what was called “Save Our Homes” under the rules of “recapture”, and the State sponsored wind insurer is finally inspecting those same shacks, either denying coverage or driving up their rates, rather than making everyone else subsidize them. In sum, many of these houses sit on land that is still quite valuable, but they need to be torn down, since they increasingly sit vacant when the owner dies or falls behind in payments. As rentals they attract those you definitely don’t want living next door.When making an offer on such a home you basically take the lot value, and deduct the $35 it will cost to destroy what is there. That is what they are worth,and always will be. They have negative salavage value. You will now find vacant lots in near ocean areas, and even on the ICW. In certain areas this is a rare opportunity to clean up the housing stock, bring it up to modern codes, and lessen the blight in our midst that bad public policy promoted. I can only wonder if similar changes in inner cities might not yield dividends, not necessarily to the housing market prices, but to the quality of life for the remaining residents.
When will the MSM stop encouraging the discussions of housing as an economic entity for banks to draw profits from? A house is a place for people to live. The idea of destroying them, smacks of just one more move by the banks to extort money from people by removing what is called unwanted blight and a drag on the (their) economy. At the base of things, generally a house in only unwanted if it is over priced. As evidenced over the last ten years, the banks have foolishly worked hard at plans that have over priced houses. The banks are now dependent on those prices staying high. And, most unfortunately, so is our government.
The banks accounting by “Mark to Make Believe” must end. The banks should have been allowed to die four years ago. By now new banks would be up and running without the undo influence on the laws and regulations than in the end, only serve the pockets of bankers.
The most profitable thing to do is let house prices get to levels seen in 1995, or even lower. The wage requirements to live in them will fall to levels that allow worker/buyers to accept wages that business can afford to pay. This can allow the dollar number on every thing to fall to a point where we can compete across the board with the world and stop the loss of good jobs to China, India and others.
Bulldozing homes is a VERY BAD idea! What happens if you are a homeowner living in a subdivision where vacant homes next door to you are bulldozed, and suddenly your “neighbors” are mice and rats living in weed covered, vacant lots? Think that’s gonna boost your home value? I don’t think so, Bunky…
That’s the interesting question to me – what’s better to have next to your underwater home: a weed covered empty lot, or house with broken windows, rotting away in the sun?
Prof. Heggs, I know many folks that would be happy to trade you their neighbors disgusting, crumbling house for a large sack of rats, and even throw in your Mr. Bunky. You seem to think it is an either or situation. I can mow a vacant lot, and kill the rats and mice. Much harder to do with a crumbling shack, toxic pool, even if empty, let alone one “rented” by crack smoking morons behind all those broken windows. Making life more congenial for squatters is not part of our neighborhood improvement plan.
From empty lot those oh so disgusting McMansion grow, so the real answer to your question is “yes”, it will improve the value of a neighborhood to clear out blighted inventory for vacant lots that may actually have something nice built on them.
Not really relevant to this post, well maybe. But, I heard on NPR today that housing is less affordable to more people today than ever. Squatters need homes too.
Why not bulldoze all the homes in America? Think about it: first everybody would have to buy a tent, which would stimulate the economy. THEN, we would have to rebuild all the homes in the entire country! woohoo economic growth on an unprecedented scale! I are an economics geni-ass! I should be on the tv!
I’m with you Roberto! And while we’re at it, crush all cars, confiscate all clothing and compost all stocks of food. Between housing, automotive, agriculture and clothing we could stimulate all kinds of industries. And if we’re destroying value anyway, let’s make it really worth while and deduct all bank accounts by up to $25,000. That way everyone will be forced to work extra hard to replenish all those goods and significantly increase productivity. Only the first $25K per account though – the rich folks will need the rest of their money to give us jobs to make the stuff… so we can buy it from them.
Wow, I don’t know where all that just came from… :p
Is it schizophrenic if you can’t figure out if you’re libertarian or socialist?