Negative House Prices

There's been a spate of stories recently that ostensibly demonstrate that in selected markets, house prices are negative; in some cases significantly negative. That challenges an important assumption in many economic models -- what we economists call "free disposal" and "non-satiation."

A rather graphic demonstration comes from Calculated Risk: http://www.calculatedriskblog.com/2009/04/new-homes-demolished-in-victorville-ca.html

Today's WSJ printed this piece about a California town threatening bank executives with arrest if they don't maintain foreclosed homes.

There was another piece a while back, before I started the blog, describing how banks in Indiana are actually walking away from foreclosures because it would cost them more to maintain the house than they would net from a foreclosure.

See this excerpt:

Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff’s sale had been set, and notices about the foreclosure process were piling up in her mailbox.

Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.

So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff’s sale had been canceled at the last minute, leaving the property title — and a world of trouble — in her name.

“I thought, ‘What kind of game is this?’ ” Ms. James, 41, said while picking at trash at the house, now so worthless the city plans to demolish it — another bill for which she will be liable.

City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to
maintenance — exceeds the diminishing value of the real estate...

Ouch.