Tuesday, March 04, 2008

Case for Foreclosure:Law of Conservation of Homes

One family's sorrow (the one moving out of this house) is another family's joy (the one moving into this house).

University of Rochester Steven E. Landsburg presents the "case for foreclosure" in his new Slate.com Everyday Economics column:

If you're facing foreclosure, Treasury Secretary Henry Paulson wants to help. "If someone is willing to make a call to reach out," says Paulson, "there's a chance we can save their homes." But Paulson can't save these homes because the homes are not endangered in the first place. They stand to change hands, not to vanish. There cannot be more homeowners than there are homes, and if one home becomes vacant, then there can be one new homeowner. Call it the Law of Conservation of Homes.

None of these foreclosed houses is going to disappear. After a foreclosure, one family moves out, and another moves in. We see the sad faces of the people moving out, but we don't as often see the happy faces of the new homeowners moving in. Nevertheless, those happy faces are out there, and we should not discount them.

That's important, and it's important in a larger context. Often when it comes to economic policy, some effects—in this case, the genuinely moving stories of good people who can't afford to live where they've been living—are highly visible, while others—the genuinely moving stories of good people who can now achieve their dreams of home ownership—are less well-publicized. That doesn't make them any less real.

Landsburg analysis on foreclosures reminds me of Bastiat's essay "What Is Seen and What Is Not Seen":

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

This difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

I think Landsburg falls into the "good economist" category.


At 3/04/2008 6:25 PM, Blogger VH said...

"Everybody has to make a living. What would become of the glaziers if no one ever broke a window?" Unfortunately, economic results that are not readily seen or accounted for are easily avoided for populism, protectionism and government meddling (the visible). Good post.

At 3/04/2008 6:54 PM, Blogger BlogDog said...

Reminds me a bit of some idiot Green types I knew in Sarasota, Fl. An area across the street from where they were renting (practically squatting) was about to be cleared for a number of new houses. They put up a sign that said something like "Goodbye tree and birds and frogs" etc ad nauseam. I suggested we should go by one night and all "Hello nice new homes!" But then, why stir up trouble?

At 3/04/2008 7:00 PM, Anonymous Anonymous said...

The other side of the coin
Commentary: The Fed's doing more damage than good

borrowing costs have not fallen all that much. Indeed, between the recent runup in long-term interest rates and the tightening of lending standards for both consumers and business, most are having a tougher time borrowing today than they did last summer -- when all manner of rates were higher.
Furthermore, in order to achieve these humongous rate cuts in such a short period of time, the Fed has had to flood the economy with money.
For example, between the end of December and the middle of February alone, the money supply M2 has expanded by a compound annual rate of 12%, according to the Federal Reserve Bank of St. Louis. This compares with a growth rate of only 5.5% from the four weeks ending February 19, 2007 through the four weeks ending July 23, 2007.
The rate of growth for highly liquid funds which the St. Louis Fed calls MZM (money zero maturity), is even greater. It soared by an annual rate of 22.7% between December 24, 2007 and February 18 of this year.
Guess what all this money has accomplished. That's right, Virginia, it has created a whole lot of inflation.
The consumer price index rose 4.3% during the 12 months ending in January -- up from little more than 1% in late 2006. For its part, the 7.4% leap in the producer price index over the most recent 12 months was the most for any 12-month period since October 1981!
While inflation can have many visible causes, such as rising food, energy or health care prices, even these three categories rising together could not trigger a jump in the overall price level without excess money circulating throughout the economy, which there surely is.
This surfeit of dollars is also affecting the value of the dollar in world financial markets. Because there are too many greenbacks in circulation relative to other currencies, the value of the dollar has declined -- a key reason for the jump in prices of energy, food and imported goods.


Wake up!

At 3/04/2008 9:01 PM, Anonymous Anonymous said...

This is exactly what I've been saying since the beginning. As someone who was responsible, didn't jump into a home he couldn't afford when everyone else was doing it, and saved his money while renting a tiny apartment in the meantime, I take this bailout nonsense personally. I'm one of the people who benefits from a larger housing stock and the following lower housing prices. And I have a feeling there are ALOT more out there like me.

Politicians should be careful.

At 3/05/2008 7:08 AM, Anonymous Anonymous said...

If these people who are buying are buying homes to actually live in, are fairly young and not trying to depend on price appreciation to support their retirement in the future then buying now may makes sense even though home prices in a lot of areas are going to fall another 20% and the housing is still a couple of years away from any kind of bottom. A house is a liability other then putting a roof over ones head and while the FED is currently printing money and devaluing the currency in an attempt to prop up prices any gain in price other then inflation from these actions is in the end is just an illusion.

At 3/05/2008 8:17 AM, Anonymous Anonymous said...

Landsburg has his head buried where the sun doesn't shine when he says, "None of these foreclosed houses is going to disappear." In communities like Cleveland authorities are demolishing foreclosed houses--effectively making the foreclosed houses "disappear."

Landsburg is also wrong when he says, "After a foreclosure, one family moves out, and another moves in" Cleveland, Detroit, Flint, Buffalo and etc. are glaring exceptions.

At 3/05/2008 9:11 AM, Anonymous Anonymous said...

Anon 8:17, Cleveland, Detroit, Flint and Buffalo's problems are far deeper than any "housing crisis." These are cities that were previously struggling, and will continue to struggle due to things like previous loss of industry due to things like changes in technology, marketable products and competition, unfriendly business climates thanks to state and local governements, etc. It's not really fair to call out those four cities specifically as "evidence" that this author is wrong.

At 3/05/2008 9:59 AM, Anonymous Anonymous said...

Anon 9:17...fair enough. I can keep tearing down Landsburg all day if you want.

In California's East (San Francisco) Bay area statistics show that 38 percent of foreclosures in the East Bay were owned by second home owners.

The result is that some good renters are evicted from foreclosed properties with a day or two notice.

But these kinds of short notice evictions of rent paying tenants are found across America not just in California.

The other problem is that the security deposit paid by the rent paying tenant often disappears with the defaulting landlord.

So while the lender now has an REO on their hands, an instant cost of $20,000 to $75,000 and a vacant property subject to vandalism the innocent tenant is now put out on the street without getting their security deposit back making it very hard for some renters to find another place to rent.

I bet Landsburg didn't even consider the impact of foreclosures on renters.

At 3/05/2008 1:08 PM, Anonymous Anonymous said...

So what is that impact on renters? Do you have statistics on the number of affected renters? Exapmples of renters being turned out on the street?

Or, perhaps the affect on renters isn't as grave as you assume? Perhaps the ones that are affected aren't having much trouble finding residency elsewhere?

At 3/05/2008 1:22 PM, Blogger Cobb said...

It seems appropriate that smart, repsonsible young people like Alex and myself can replace idiotic, irresonible young people (who sign contracts they don't understand) as homeowners.

The one issue on which I disagree with Landsburg is when he says that those who lose their home to foreclosure are no worse off than if they had never bought the home in the first place. In many cases, those people owe more than the house is worth, and thus, are worse off than if they had never "bought" it.

But, I don't care! They were dumb. They bought something they couldn't afford and now they're facing the consequences. And, if a mortgage broker committed some kind of fraud when he sold someone that mortgage, there's recourse for that. Sue him. Otherwise, these people need to quit their whining and accept the fact that they made a very bad decision.

As an investment advisor, I sometimes make bad investment decisions. Do I whine about it and claim to be misled by someone and request that the government reverse my mistake? No. I deal with it and learn from it.

At 3/24/2008 11:21 PM, Anonymous Anonymous said...

I honestly feel sorry for the family who used to live here. I hope they can find a way to save the beautiful house


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