Economists consider tearing down homes to protect housing market

By Elizabeth Razzi
Saturday, June 12, 2010

Douglas Duncan, vice president and chief economist for Fannie Mae, raised a provocative idea at a recent meeting of real estate journalists in Austin: Some of the misconceived housing developments built during the boom years might have to be torn down because they don't make financial sense.

Duncan agreed with Stan Humphries, chief economist at Zillow.com, who warned that a "tremendous shadow inventory" of homes is poised to come on the market. That includes future foreclosures (due to negative equity and continued high unemployment), homes that will end up in foreclosure after failed loan modifications, and homes from what he calls "sideline sellers" who have been biding their time until the housing market improves. Humphries said home prices won't bottom out until the third quarter of this year, leading to "the second phase of the housing recession": below-normal price appreciation for several years. (The long-term appreciation norm is 3 to 5 percent per year.)

Said Duncan: "Some of that shadow inventory could have to be torn down. It was not economically viable when it was put in place." That includes some boom-time developments in California's Inland Empire and Central Florida. Duncan said people might find that the cost of sustaining their lifestyle in some developments -- including high transportation costs to far-away jobs -- is greater than the cost of the home. That could wipe out demand.

Who would pay for tear-downs? What would happen to the people who have hung on to their homes despite the foreclosures all around them? All are unanswered questions.

Economists are discussing the idea, but Duncan said he doesn't know of any policymakers considering it. "It's un-American to think about tearing down housing," he said. "But we have a long history of ghost towns."


© 2010 The Washington Post Company