Arnold Kling  

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From the WSJ Real Time Economics blog, here and here.

1. Banks have an inventory of about 1 million foreclosed homes, plus another 5 million homes where the loans are badly nonperforming.

Any way you look at it, that is a huge overhang. My wife has an uncle who is an independent home builder near Norfolk, Virginia. He has built only two houses in the past few years, and neither one has sold. Some unsold homes in his neighborhood have been marked down 40 percent from when they were first put on the market, with no buyers. I remember seeing a lot of foreclosures in his neighborhood when we visited a year ago.

My personal opinion is that the foreclosure backlog is the biggest reason to be pessimistic about the economic outlook. If I were in a policy position, I would be trying to get these foreclosures through the system as rapidly as possible. Trying to prevent foreclosures is simply a futile effort. It does nothing but keep the market out of equilibrium longer.

2. Speaking of good news, Matthew Slaughter has calculated that if employment recovers as slowly as it did after the 2001 recession, it will take almost 10 years to recover the jobs lost during this recession. He has some other interesting numbers (click on the second link, above).

Again, my view is that so far the 21st-century has been shedding a lot of the 20th-century work force. This is a painful process, and I am not convinced that government can do much about it. By the time the economy gets back to full employment, it will look very different than it did in 1999.


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COMMENTS (10 to date)
R. Richard Schweitzer writes:

Perhaps it is due to the fragmentation of the credit loss exposure resulting from securitizations (which the service organization in Reston might resolve), but it is somewhat puzzling that there has not been definitive movement toward the development of conversions of defaulting debtors into renters of the same properties, to the extent that their incomes permit, then package the ownership of diverse rental properties through a form of securitization for onward resale; or possibly in REIT form.

Naturally, the rental arrangements would have to allow for sale of the individual properties.

But, there is NO movement to change the nature of the underlying assets from non-earning, cash-flow "dead" to a measured cash-flow set of assets .

Bill Conerly writes:

Foreclosures, or lack of them, do not change the housing supply-demand balance. A foreclosure changes ownership of an existing housing unit. It does not change the number of housing units, nor the number of households. Because housing units go back and forth between owner-occupied and rental (as through condo conversions, would-be flippers having to rent out their investment properties, etc.), analysis has to be based on the total number of housing units.

This does not change the policy implication that we should go ahead with foreclosures where the debtor genuinely owes the money and is in default.

Tom Hickey writes:

It's not just about REO, units presently on the market, or inventory. The housing issue is going to come down to contract law with respect to proof of ownership in foreclosures that affects securitizion.

A lot of the paperwork is bolloxed up, and the fact that most of the mortgages were securitized is going to pit powerful interests against each other in the courts. This is going to drag out for some time, and it could cost the major securitizers big, possibly resulting in another financial crisis. At a minimum, it is going to show the rotten underbelly of the process, undermining confidence in the system. Yves Smith has been documenting this at Naked Capitalism.

"It's the corruption, stupid."

Dave A writes:

Why don't I ever see property taxes talked about with regards to the housing crisis?

You say that newly built homes have been "marked down 40 percent" and, as someone currently looking to buy, I can attest to this being true of new and old homes. The problem is that property taxes aren't marked down accordingly and you end up having property taxes that are literally equal to your mortgage payments. I see these zombie houses all the time in my home search. These are beautiful homes at great prices that can't be purchased by willing buyers simply because the property taxes put them way over affordability for people looking in those price ranges.

I understand that this issue varies based on state and local laws but it seems like more and more municipalities are refusing to drop property taxes even in the face of massive home value drops. It would be interesting to see a formal analysis of housing market recovery versus property tax structure.

MernaMoose writes:

Again, my view is that so far the 21st-century has been shedding a lot of the 20th-century work force. This is a painful process, and I am not convinced that government can do much about it. By the time the economy gets back to full employment, it will look very different than it did in 1999.

But this roll-over process you keep talking about, must in reality be an ongoing kind of thing.

Recalc or whatever you call it, may be a factor right now, beyond whatever "normal" is. But I'm hard pressed to believe it's the primary factor slowing the economy down.

The housing market problem (et al) looks to be a far more likely culprit. And I agree the collective "we" should be trying to push a market clearing through asap. I have also long suspected, it's not happening because there are too many powerful interests who will get hurt in the process.

It's not clear to me just how over-built the housing market really is at this point. But houses represent a huge fraction of the economy, and nothing is going back to "normal" until housing has cleared. Where "normal" is going to be, will depend a whole lotta-lot on just how over built things really are.


The Market is a nervous jerk. It over-reacts to everyone and everything. Are these big housing price drops really permanent, or are they more of a (longer than perhaps normal) blip on the time line? I suspect the market has over reacted and that long term prices will stabilize at something higher than they currently are.

Liam writes:

@Dave A,

I would love to see the numbers in regards to what the market value of the houses are in a certain area and what the property taxes are.

I also wonder if the municipalities don't lower them (as they should) because they ae unable to see how they could make up for budget shortfalls. As anyone who follows this blog can tell you, the logical is terribly flawed if that were the case. If anyone has some data on this I would love to see it.

Doc Merlin writes:

'I would love to see the numbers in regards to what the market value of the houses are in a certain area and what the property taxes are.'

Market value is such a horrible term,

1. as you don't know the market value on a non-fungible good till it has actually been transacted.
2. It assumes that there is no endogenaity wrt selling the good, e.g.: that the reason you are about to try to sell the good isn't the same reason everyone else is about to.
3. The market is liquid enough that your sale won't substancially affect it.

Alex B writes:

How will the economy get back to full employment?

If the economy is currently under the process of shedding "old" jobs (the biggest losses have been in manufacturing and construction) then how will these workers be re-employed by "new" jobs, presumably in the service industry?

They would need to be re-trained, which costs money, which the government isn't going to provide with our almost certain move toward austerity. I suppose some or perhaps many of them are near retirement age baby-boomer workers who will just retire and the young new additions to the labor-market will be more suited for the 21st century service jobs, but I don't see the economy reaching full employment without some significant help from the government or a change in definition of full employment.

If indeed we are shedding old jobs for new, then that means the old jobs are now structurally unemployed which means a higher natural rate of unemployment (If you define it as structural + frictional).

So, I agree that this is a painful process, but I disagree that the government can't do anything about it. Funding for re-training would help, but even that won't be enough. The painful part about it is the fact that there are great gaps in potential output we are losing because our workers sit idle looking for someone to hire them and that there are some workers who will never work again.

David Guise writes:

"Foreclosures, or lack of them, do not change the housing supply-demand balance. A foreclosure changes ownership of an existing housing unit. It does not change the number of housing units, or the number of households."

During the speculative excesses from 2003 to 2007, several million homes were built that were not needed by real demand. The housing crisis will not be over until supply and demand for houses is again in rough equilibrium.

The Fed is about to launch into a new round of buying loan securities with newly created money. Few economists believe that will do more than marginally increase GNP or employment. Worse, it will bring a magnificent tool for handling recessions into derision for decades.

The Fed must directly target the genesis of the economic collapse, the falling value of homes. It could buy one million homes at auction for less than $300 billion and guarantee that they will remain off the market until home values are 10% higher than they are now.

That would immediately restore confidence to homeowners struggling with mortgage payments and to banks making new home loans. Reduced supply of homes would create demand for the construction of new houses and all of the furnishings and hardware that go with them. Above all, it would begin to create employment and therefore new consumption.

There presently exists no mechanism that will allow the Fed to fund any government institution charged with such a program. One has to ask why there is not even discussion of such direct intervention in the real economy.

Controlling the supply and demand for homes to influence the real economy is not conceptually different from controlling the supply and demand for bonds or currency.

The Fed cannot store one million empty homes as easily as electronic bonds but banks in essentially the same kind of business already do. Costs incurred in their management will be recovered when the houses are resold at a profit.
Selling houses and cancelling the created money would be a potent new tool for the Fed to cool what we hope will one day be an overheating economy.

MernaMoose writes:

The Fed....could buy one million homes at auction for less than $300 billion and guarantee that they will remain off the market until home values are 10% higher than they are now.

So why not have the Fed buy the homes and promise to burn them all down? Why wouldn't that be even more effective at stimulating demand?

But I'm still not convinced the actual housing market is all that over built. Things may be slow in the southwest (just for example) but prices in CA are also still insane, by most of
the rest of the country.

I personally know people in SoCal who want to leave, but are "waiting for the market to recover so I can get a decent price out of my house". The long term exodus from SoCal is not over, which is why I don't believe the demand for housing in surrounding states has really vanished.

The problem may not be that there's really too many houses. The problem is more that people got used to the idea that house prices go up fast, forever and ever amen. Now they're coming down after the big high and wow man, what a bummer.

So We the People collectively, aren't so interested in seeing housing prices reach the clearing floor because so many of us have ourselves invested in housing. And we just hate seeing the wealth we'd thought we had, just evaporate.

Now combine that with the fact that we've got all these "mortgage instruments" laying around, whose chief attribute is that they're legal fog banks. And because of these, many wealthy interests stand to loose big time when houses hit the market clearing floor.

Resisting the inevitable -- it's not just for governments anymore.

The *only* thing I could see the government doing, that might help alleviate this whole situation, is a good round of inflation. It'd ease the head ache all those home owners have, because they'd feel like they "at least got what it was worth out of it" when the sold their houses.

And, if people reached that point, maybe the Mortgage Instrument Fog Bank would then be forced to deal with their own problems. Or they'd figure out how to sweep them under the rug. And/or, somehow, they'd be forced to purge the junk from the system. We hope.


I doubt it would do any good if The Fed bought three million houses and burned them all to the ground. That's not where the real problem is.

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