Economists consider tearing down homes to protect U.S. housing market

June 14, 2010 by · Leave a Comment
Filed under: Real Estate News 

This is a hilarious idea.  It follows the classic supply and demand theory.  Economists are proposing  to tear  down houses to reduce the “shadow inventory” that are on the banks books as REO (Real Estate Owned) foreclosures.  It is true that if you reduce the supply of housing, that will tend to keep prices stable and then cause them to rise with all things equal.

The problem is that we are butting up again with the same problem I have been writing about for 2 years now.  What are are saying is that we want to keep prices artificially higher than they should be.  This punishes people who are saving up for a home by forcing them to purchase these homes and in effect paying much more for them through the interest charges that go along with a home mortgage.

Wouldn’t it be a better idea to force this inventory on the market and have that supply bring prices to reflect the current housing situation?  Wouldn’t that in effect spur buying in the housing market and then you would see spill-over in all the purchases that go along with buying a new home?   We as taxpayers are paying for this crisis so why should the people benefit from this mis-allocation of resources and turn a bad situation into a positive one.   The more home-owners you have the more of a community is built and that also helps bring down other problems like crime and brings in revenue to the cities through property taxes.  Bottomline this is a laughable idea and will be a quite sad state of affairs if we start carrying this out as a policy.  We can be more creative than that….can’t we?

Washington Post – Duncan agreed with Stan Humphries, chief economist at Zillow.com, who warned that a “tremendous shadow inventory” of homes is poised to come on the market. That includes future foreclosures (due to negative equity and continued high unemployment), homes that will end up in foreclosure after failed loan modifications, and homes from what he calls “sideline sellers” who have been biding their time until the housing market improves.

Humphries said home prices won’t bottom out until the third quarter of this year, leading to “the second phase of the housing recession”: below-normal price appreciation for several years. (The long-term appreciation norm is 3 to 5 percent per year.)

Said Duncan: “Some of that shadow inventory could have to be torn down. It was not economically viable when it was put in place.” That includes some boom-time developments in California’s Inland Empire and Central Florida.

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