What is the Significance of $1,000 Houses?

There was a recent report on CNN about how there are lots of listings for low-priced houses in places such as Cleveland, Detroit, and Indianapolis. The report admitted that these houses need work - say $20,000 worth - to make them livable, but they represent a golden opportunity to acquire real estate on the cheap.

Markets are generally pretty adept at conveying information. The first thing that comes to mind is that livable houses in these places aren't worth $21,000. If they were, the cheap houses would have all been snapped up.

One of the houses is mentioned as last having been sold at $70,000. Put another way, this means the value has declined from $70,000 to less than $20,000, or down about 70%. We believe that this is not an exceptional decline, but a fairly representative one.

The official numbers don't show this pervasive catastrophe yet because most owners who don't have an urgent need to sell, aren't selling. They are holding out for price recovery, and in their minds maintaining an inflated valuation.

There is a large, yet difficult-to-measure, overhang of houses whose owners imagine themselves patient, yet are probably just living in the past. Unable to let go of perceptual wealth, they can't sell the buildings for 'less than they are worth'.

This capital immobility is hurting the economy in at least two ways. First, it is keeping people stuck in place. Household mobility in the USA is at an all-time low. This hampers people's ability to relocate to better opportunities. Second, it is tying up capital in non-productive assets. Empty houses contribute very little to an economy. If sold, they could be inhabited, and thus a source of income - either landlord's rent, or owner's equivalent rent.

In time, most of the overhang will come to market and clear at the new equilibrium level. The rest will slowly rot in place, their deluded owners basking in their pride of ownership of an asset that is too valuable to sell at the market price.