I may have come up with a possible solution (or cushion) for the falling prices in this housing market. The source of inspiration for this idea was the best part: I was watching Conan O'brien the other night and Jim Cramer from Mad Money was a guest. He jokingly made a comment on that show, and although may have been a little crazy, it made some sense. His solution to the problem is to burn down all foreclosed homes. His reasoning was that if we eliminate the surplus, we don't have a flooded market, and house prices rise. Although, burning down the vacant properties is a little extreme, I think he may be on to something. Follow me for a minute.
I have a basic understanding of supply and demand and how those factors effect the price of a product. The product in this market is real estate. We have an abundant amount of vacant, unsellable houses in the market. According to the US Census Bureau in April 2008, there was a record-breaking 2.28 million vacant homes for sale in this country. Add those to the record-breaking number of occupied homes for sale and this means the supply is up. The longer they sit vacant, the worse their condition becomes, lowering their values through the floor. Meanwhile, the lending institutions are cracking down on sub-prime lending. It is harder for a family to receive financing for a home than it was a few years back. We have less qualified home buyers, so this means the demand is down. This mixture of high supply and low demand causes price reduction. Anyone that has tried to sell their home in the last few years knows this is true. What is needed is a shift in either supply or demand in the market.
I truly don't understand the bailout plan's details, but Bush's plan was to try and fix the demand by fixing the banks, allowing them to sell more loans. This didn't work because banks now have a bad taste in their mouth due to the sub-prime lending mess we are currently trying to correct. Also, there just isn't enough money that you could throw at the problem to make it go away. Listen to this interview with Michael Greenberger for a better understanding of some of the major causes to this current economic crisis. Although responsible lending is an important factor to prevent this from occurring again, it does not solve the current issue.
So how do we, responsibly, shift the supply curve to our favor? We carefully eliminate the excess product. What I mean by this is allowing the government to somehow selectively facilitate the tearing down of these foreclosed dwellings, recycle as many of the reusable materials as possible, and auction the vacant lots. The logistics of this effort would have to be worked out in detail, but the benefits would be plentiful and a step in the right direction:
1. This would create desperately needed jobs in the destruction and recycling industries.
2. It would increase our supply of recyclable materials: copper, wood, etc. (Reducing their price)
3. This would allow for the builders to increase production of new homes. Also creating more jobs.
4. Having new homes in our neighborhoods would only help increase the value of our existing homes.
5. More efficient homes could be built to allow for more energy conservation.
6. Older, less efficient homes could be selected for destruction first, eliminating deteriorating properties that may contain lead based paint, asbestos, mold or other toxic substances.
7. Most of all, this swelling dwelling market will decrease in number, raising the prices of existing homes.
I can only think of a few roadblocks:
- There will be a waste product that will have to be dealt with.
- Squatters may need relocated to affordable or assisted housing.
- Clean fill will be needed to fill any basements.
So how would this work? The government would have to either buy these foreclosed homes at a fraction of the debt or give breaks to those that buy them for destruction purposes. The initial sale price of a foreclosed home would have to be low enough to where the government or purchasers could make a profit, or break even from recycling the material and auctioning the vacant lot. If an entity besides the federal government decides to tear down a property, the government may need to make up the difference of what is owed so this deficit doesn't get out of hand. The government could also give tax breaks to anyone holding a vacant lot that was obtained in this manner, allowing the lot owners to hold the lots until prices increase. Like I said, there are many details that need to be worked out.
Do I honestly think this will work? I don't know. It's just a crazy idea that makes sense to me. So instead of senselessly paying the CEOs of major multi-billion dollar corporations to go on luxury retreats, let's be creative and think of more productive ways to stimulate this economy, and especially this intersting housing market. Support NAR's stimulus plan. And maybe mad Jim Cramer should be our next economic advisor to the president? ...Nah.
I am not an economist. I did, however, take micro and macro back in college, and I once dated an economist. This qualifies me to provide solutions to fix the world's economy. Please leave comments, especially if you see anything incorrect.
1. Source of home vacancy rates: http://www.cbsnews.com/stories/2008/04/28/business/main4050898.shtml