Should we teardown foreclosed homes?

Mark Cuban argues that one way for the housing market to rebound is to bulldoze foreclosed homes. This would reduce inventories causing the market for new and existing homes to rebound. It also creates the secondary benefit of creating jobs. What do you think?

Topics

Economy

Finance

Foreclosure

Real Estate

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Scott Albro

asked on Sept. 20, 2011

Nicole Fende

President & Chief Numbers Whisperer, Small Business Finance Forum

Posted on Sept. 21, 2011

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Michael Santarcangelo

On a personal and business level my reaction is an emphatic NO.

While Mark Cuban may be a successful businessman, I don't believe he has considered the profound impact on the banking industry if the homes were to be destroyed. Here are just a few reasons this would have a devastating impact on financial services.

1. A foreclosed home sits on a bank's balance sheet as a asset. Perhaps not as valuable as the original loan, but I guarantee you it is far more valuable than just the land. Generally the split is 80 / 20, so banks would have to write off 80% of the value of those assets. If you thought the last write-offs were bad, this would be a blood bath.

2. Any realtor can tell you that empty land is far harder to sell than a property which has already has a home. So now you've added a liquidity issue in getting the rest of those properties off their books.

3. Empty land may also have a higher risk based capital requirement, further reducing available capital in the banking sector.

4. Who is going to pay to safely bulldoze these properties and ensure that materials are disposed of properly? That is no cheap proposition?

5. This could also lead to further devaluing the other homes in a neighborhood where one or more homes were destroyed. This could be the final straw for others to give up on struggling to make their payments, thus leading to more foreclosures and vicious downward spiral.

On a personal note I think what a waste of resources, Aren't we as a society better than that?

Christopher Farrell

Creative Director, Golden Artist Colors, Inc.

Posted on Sept. 21, 2011

Nicole,
I think you make some interesting points. But I question your points 1, 2 and 5. I think those dynamic would be very dependent on the market where the potential "deconstruction" occurs. Are you taking population shift into account, and the age and condition of the real estate.
I live in rural New York, there are many properties with abandoned houses on them. Since there is agricultural value to much of this land, your assertion that empty land is harder to sell than land with a home overlooks the reality of certain rural areas or areas with declining populations and growing agri-businesses.
On point five, the devaluation of home would be an issue if (as you suggest) one were to go into a neighborhood and select houses out of a row and turn them into piles of unsightly rubble. But, in some declining suburban and urban markets, the structures can be more of a liability than an asset by attracting crime and consuming resources to maintain or protect that would be better utilized by a more concentrated community. Then there is the simple dynamic of supply and demand - getting surplus inventory off the market can help values.
But, I do agree with your personal ethic: waste is to be avoided. I don't think this describes Dallas (Mr. Cuban's neighborhood) but I've seen a lot of places up north with homes and other structures that are more a liability than an asset. This is a very expensive path to more green ways or farmland, but it could be a welcomed idea under the right circumstances.

Nicole Fende Replied on Sept. 21, 2011

Hi Christopher,

Thanks for the reply, this is definitely a hot topic for everyone.

Regarding point 1 - The value on the bank's balance sheet. Given how drastically banks already had to take write-offs for just reduction in value I believe removing any home from the property would create a further drop. Granted I have not studied the balance sheets of the big banks to say with certainty, however I would give it a high probability

Regarding point 2 - You are correct, there will always be exceptions to the rule, and in some cases the value truly is in the land not the building. However the foreclosure phenomenon has largely affected single family homes in populated areas. At a glance the most heavily affected areas are urban not rural. (FYI I grew up in rural Northern Michigan - even hunting property there is worth more if it has a building on it).

While there may in fact be places selective deconstruction would work, I believe careful research would confirm that the majority of the foreclosure properties would not see a benefit. Therefore Mr. Cuban's solution is only viable for a small slice of the total problem.

Regarding point 5 - I actually own a home in a very nice suburb of Minneapolis that was hit dramatically by foreclosures. I can assure you bulldozing them down would have only exacerbated the problem. However as with point 2, there are exceptions to the rule. In limited cases it would help, but it is not a solution to this enormous problem.

If banks do decide to demolish certain foreclosures I hope they offer the innards to Habitat for Humanity first. HH has stores to resell salvageable items, raising money to refurbish the ones worth saving.

Brian Hickey

Posted on Sept. 22, 2011

There will be a significant amount of homes that were perfectly good homes when the owner made his last mortgage payment. Then after years of deterioration, environmental issues (mold) etc. - many of these homes will be teardowns by default.

Thanks,

Brian Hickey
teardowns.com