Back in 2005, I remember reading some “investment advice” that I’d like to attribute to David Lereah, former chief economist for the National Association of Realtors. It went something like, “Real estate is a safer investment than the stock market, because the value of a stock can drop to nothing, but real estate will always be worth something”.
Even if the statement were true, as millions of homeowners have discovered, the fact that your property has a positive net worth doesn’t protect you when you owe more than the property can be sold for.
As it happens the statement isn’t true. A house in need of serious repairs, poorly located, or worth more as a vacant lot can be a liability for the owner and have a negative net worth. The market is better off without these properties. L coined a name for these properties, “bulldozer bait”.
Now if you went back and read some of my former posts, you’d see that I’ve said that Bulldozing Vacant Homes Is a Dumb Idea. What I am opposed to is the government buying worthless properties at above market value from lenders to protect their balance sheet. I’m not opposed to lenders and property owners taking their lumps and leveling their liabilities. There are others who view the situation differently however. [Hat tip to Patrick.net]
[T]he idea of bulldozing homes does seem rather unsavory, does it not? Perhaps some of these homes are condemned and/or beyond repair. In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over. But does this really describe all of the cases? This is reportedly happening to thousands of homes across the U.S.
My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy. If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.
It’s not the job of lenders to hold these properties on the off chance that they would make good rentals “at some point in the future”. In the meantime, they are stuck trying to maintain these properties and keeping them from turning into crack houses and havens for crime. Many times these structures hurt the local economy by lowering the value of other, more viable properties.
Folks have been abandoning homes in America since back to the Pleistocene era. If you take the time to stop and read historical markets, they will often say “Former townsite of …” without a building in sight. Sure, there are historically significant properties that are worth saving, but frankly, there are a lot of crummy old houses out there that do not suit modern tastes and needs
There’s plenty of inventory out there. Some of it is deteriorating because it is not needed, nor is it likely to be so in the foreseeable future. Let’s not mourn the passing of properties from the “shadow inventory” to “bulldozer bait”. Concerns about the size of the shadow inventory depresses all the housing market. Hurray for the lenders for finally doing something right.