16 July 2009

Empty Houses and Homeless People

In many parts of the world, the economic bust has produced an interesting paradox: Many people are losing their houses, and others are losing wages that would help them buy houses. On the supply side, a wave of new housing has hit the market at the same time as new vacancies have increased. With a fall in demand and increase in supply, there's a surplus of properties and that's why we see for rent and for sale signs popping up everywhere.

So what's the solution for this problem? Excluding big factors (sudden increases in incomes, the desire to own, property destruction, etc.), the answer is lower prices.

Well, problem solved, right? Not exactly. That's because prices for real estate tend to be "downward sticky," i.e., owners are happy to see them go up (and charge higher selling or rental prices), but they are unhappy to see them going down. So, even if "the market" indicates that prices may drop, owners may not drop them. Instead, they stick to their higher prices and hope to find someone willing to pay them. The trouble is that this "someone," unless he's an uncle or has a rare myopic disorder, is probably going to be looking at market prices are buying houses that offer "good value for money." And so the overpriced houses remain unsold and the overpriced business locations remain unleased.

Besides waiting for owners to realize that they are losing more money by waiting than they are gaining with an eventual -- and not guaranteed -- sale, there is very little that outsiders can do to affect this situation. By far the most common -- and most stupid -- "solution" is offering cheaper finance to new buyers. These government-sponsored programs do nothing to reduce prices in the market; they merely add a subsidy to demand.

I would prefer that the government organize auctions of property for rent or sale. The basic idea is that there is no RIGHT price except the price that emerges from the auction. If there are enough people looking for property "at the right price" and enough property available, they will be able to match up in an auction. After all, a city with low vacancies is a city full of residents and businesses that are contributing to that city's vitality. A city with homeless people, few small businesses and vacant signs here and there is a dying city.

Bottom Line: The real estate market does not adjust very well when big changes hit it. Auctions to match supply and demand can restore balance and increase the utilization of one of our precious resources: real property.

1 comment:

  1. WaterSource/WaterBank16 July, 2009 04:52

    Moody’s Investors Service today ( 7/15/09) cut California’s debt rating two notches, to "Baa1" from "A2," warning that the risk is rising that California could have trouble paying its bondholders if the budget stalemate in Sacramento doesn’t end soon.
    The firm said the state remained on its "watchlist" for further downgrades.

    Moody’s "Baa1" rating is just three notches above the level at which California’s $59 billion in general obligation bonds would be considered "junk," or no longer investment-grade in quality.

    California has since early this year had the lowest credit grade of any state.

    State Treasurer Bill Lockyer has insisted that California would never default on its bond debt. The state Constitution mandates debt payments...

    It might be a good thought to consider backing the I.O.U.'s.

    All I have to offer is a new Source of fresh water to develop for the region ... renewable energy, jobs, water in the bank...water for energy independence from biofuels, that sort of thing.

    Are there any other real ideas ?

    WaterSource/WaterBank
    waterrdw@yahoo.com

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