U.S. housing market to get boost from home demolitions

Real estate supply overhang a threat to artificially high prices

As millions of Americans lose their homes to the process of foreclosure, they eventually end up as statistics, adding numbers to the one third of the population that rents housing. This process would result in rising rents except that foreclosed homes are being bought by small scale entrepreneurs as rental houses. To date, rental rates have been fairly stable in most locations, while large numbers of foreclosed homes have been held off the market. As many as one in nine U.S. homes are unoccupied this year. Meanwhile many Americans have been doubling up with relatives or have become homeless.

Last year the Senate Housing Committee came up with a scheme to support high real estate values in order to protect the assets of institutions that hold mortgage debt. The Housing and Economic Recovery Act of 2008 provides general fund financed grants to local governments through the Federal Neighborhood Stabilization Program (NSP). According to the U.S. Department of Housing and Urban Development (HUD), NSP funds may be used to:

Establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties;

Purchase and rehabilitate homes and residential properties abandoned or foreclosed;

Establish land banks for foreclosed homes;

Demolish blighted structures;

Redevelop demolished or vacant properties


While the program allows for local governments to go into the real estate flipping and/or landlord business, it is doubtful that most towns will opt to take on such an unusual role, especially given the current unsettled state of the real estate market. The most economical and least risky choice would likely be razing homes and banking the raw land for future development. That is exactly the outcome which will stabilize artificially high real estate prices, the ultimate aim of the Senators and the financial industry which has spent $5 billion lobbying Congress over the past decade.

The Obama administration is also considering a "shrink to survive" proposal which involves razing entire districts. The radical experiment which would be tried in 50 U.S. cities is to be headed by Dan Kildee who describes the destruction of neighborhoods as similar to "pruning an overgrown tree." The program is planned to be applied to neighborhoods identified in a recent study by the Brookings Institution, including those with high vacancy and unemployment rates. Industrial policy to restore the health of the labor markets does not enter into consideration.

Real estate values became artificially high due to a prolonged sequence of actions undertaken by The Fed and Federal regulators: maintaining low interest rates, progressively relaxing mortgage loan qualifications while introducing unprecedented teaser rates and negative amortization loans. All of this within a frenzied bubble market environment. During this period of rapidly escalating real estate prices, buyers, fearing that rising prices would leave them behind, made purchases based on illusory monthly payment costs, often not realising the full interest rate reset risk involved. The actual sale price of the properties reflected a fraudulent monthly cost. Without the various loan products the high values would have never been realized.

Now the challenge for those who are managing our economy in the service of the financial sector is to maintain those artificial valuations and maintain the fraudulent high claims on American household budgets. With the overhang of vacant homes depressing real estate market values the solution is to destroy the excess supply. As the previous owners of the razed homes add demand for the existing rental housing market, rents will rise and put a floor under the broad real estate market. In effect the profits that the mortgage bundlers made will be covered by claims against the incomes of renters through higher rents.