Low interest rates lead to overbuilding leads to demolition
The chain of events whereby easy money leads to malinvestment that impoverishes a society is now fully manifest in the United States. You remember Victorville, CA where new homes were being demolished because it cost more to maintain them than to demolish them? (see post here) Well, that same phenomenon is going to be at work all across the USA because we have just witnessed one of the greatest episodes of malinvestment in the history of the world.
An article over at the Telegraph discussing this possibility has really grabbed people’s attention (137 diggs, 66 delicious bookmarks, 474 comments at last count) and seems to be everywhere. Here is a snippet.
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.
The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.
Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the “rust belt” of America’s Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.
Now, Mish has a post over on his blog which reminds us that the median home price in Detroit is now $6,000. Obviously what is happening in Flint right now is coming to Detroit very soon. But, I also want to remind you of the Victorville incident and exurb overbuilding – it is not just cities. No one wants that housing stock. According to Google Maps, it takes 2 hours and 40 minutes to commute 81 miles from Victorville to LA in traffic. That’s not something many people are willing to do. And if you look on a map, you will notice that Victorville, far inland, doesn’t have many other huge cities near by either (Barstow is 34 miles away and has great outlets for those of you who like shopping).
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Translation: Much of the building in Victorville was malinvestment. This is why houses are being demolished there. You should ask yourself how did we get to a place where entire cities are shrinking via demolition (Flint), where other cities have a median home price of $6,000 (Detroit), and where other previously sleepy towns are also shrinking via demolition (Victorville). Why is the U.S. so shattered financially that we must resort to demolition houses in order to move forward? The answer, of course, is easy money.
- Because of the rise of deregulation, a shadow banking system forms in the United States and globally. Long-Term Capital Management, famously leveraged 100-to-1, the most famous part of the shadow banking system fails spectacularly and is bailed out.
- The bust frightens the Fed under Alan Greenspan, which pumps liquidity into the market due to this event and the later Y2K scare.
- We get a massive bubble in shares, especially technology and telecom stocks.
- The bust frightens the Fed under Alan Greenspan, which, fearing deflation lowers interest rates to 1%.
- A massive housing bubble expands with huge overbuilding of the U.S. housing stock
- The bust frightens the Fed under Ben Bernanke, which, fearing deflation lowers interest rates to 0% and engages in both quantitative and qualitative easing.
Do you see something wrong with this picture?
Source
US cities may have to be bulldozed in order to survive – Telegraph
Ed,
While you are correct that there was a lot of overbuilding and your analysis of the reasons are valid, I think that you’re conflating a couple of distinctly different problems.
Flint is a victim of changing economic patterns. Its problem is not overbuilding rather a deterioration of its economy. Whether that should have happened is a subject for another very long discussion but it’s not unique to America.
Leave the interstate highways and take to the back roads and you’ll find thousands of Flint’s throughout the
midwest and west that withered and died. They’re called ghost towns. Some died because the mines played out and others because the family farm became a relic. I’m sure there were articles at that time decrying the turn of events but the world did go on.
The Victorvilles of the world are another story. Some (Victorville is a good candidate) were just incredibly stupid places to build homes. Others will probably survive though I doubt recovery will be swift.
There are lessons to be learned from both Flint and Victorville, but I do think they are different lessons.
Tom, you’re right that I am conflating two different subjects. You could say that I was using the Flint story as an excuse to talk about Victorville again. Flint and Detroit are a subject of a more complicated nature. I will re-visit this pot or comments later when I have more time.
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Sent from My Windows Mobile Handheld
Edward Harrison
Tom, just back and can give a few more thoughts. The nexus of Victorville-Flint-Detroit comes through the fact that all three areas demonstrate that the United States has a glut of aggregate residential property.
In Victorville, we see new building that is being demolished because demand to live there has diminished – demographic patterns are now moving in reverse.
In cities like Washington DC, Miami, New York, Phoenix and Las Vegas to name a few, despite demographic patterns and the continued demand to live in those cities, there has been overbuilding, especially of so-called ‘luxury’ apartments and condos.
But in cities like Flint and Detroit, it is the existing housing stock which is now unwanted because of demographic patterns.
The thread that connects all of these stories is the excess inventory of residential property. While Flint might have suffered the same demise had the bubble not occurred, cities like Cleveland, Pittsburghand Baltimore show that terminal decline and the need to destroy housing stock is not a necessary outcome.
So, in my view, the need to destroy houses in Flint is as much a story of overbuilding as the need is in Victorville.
Ed, I always enjoy jostling with you on these sorts of things.
I don’t think that Flint has much relevance to cities of the size of Cleveland, Pittsburgh and Baltimore. It’s pretty much a company town suffering from the reality of the company’s demise while the others are large metropolises supported by a diverse economic base.
Flint, Detroit and similar communities are suffering from an age old problem. They relied on a single industry to support their community which is a prescription for oblivion. Many parts of the industrial mid-west did so and are now paying a high price.
So far as I know, there were not a lot of new homes constructed in Flint during the bubble (let me know if you have data indicating otherwise) which would indicate to me that Flint is simply talking about destroying housing that has been around for some time and for which there is no further need. Put another way, I’m unconvinced that Flint’s problems are a result of overbuilding.
I hasten to add that though the videos of several houses being destroyed in Victorville received a lot of play on the Web, in fact there have only been a few that were in fact torn down. To the best of my knowledge this is not an ongoing strategy in that town.
Overbuilding is an issue and a big one. I personally don’t think that we have come to grips with the issue yet. The political solution to the present problem seems to be to return to the status quo ante and gin up the new home builders. I just don’t think it was or is Flint’s problem or a problem for a lot of cities similar to Flint.
Franklly, destroying older housing that is likely to have little utility is not a bad strategy for a city like Flint. If they can recreate the town as a charming place to live and in the process attract new viable industries then more power to them.
Overbuilding versus industrial ossification and its knock-on effects and how you deal with each are separate issues.
Thanks for your response to my comment. Take this one as its intended – a counter argument not an attack.
I do not think the demolition is the result of overbuilding per se, but overbuilding of un-affordable too large housing units. Until 10 or so years ago the average house was 1900 to 2400 square feet. THe Mc Mansions built in the boom were 3500 to 5000 sq feet. Both units were to house a 4member family.
After WWII the average house was 850 to 1100 square feet and the average family 5. While I agree it was not comfortable living in the smaller houses, and people moved up to larger units as soon as they could AFFORD them, it took a long time to move up.
With the era of cheap $$$, no on had to move up. You could borrow 100+% of the price of the house, hold it for 6 months, re-finance and buy a whole garage of toys, wait another 6 months, re-finance and buy the king and queen of the castle new cars and hey, a boat of PWC all around.