Do Credit Bubbles Leave Behind Any Value?

My Sunday WP column, titled Note to investors: It takes longer to bounce back from a credit crisis, led to an excellent question that I did not address:


I enjoyed reading this article today. However, I thought some about the statement that credit bubbles do not leave physical infrastructure after they burst, and I wondered what your thoughts were about the excess housing inventory left over from this crisis?  Isn’t housing productive in some way, if even to keep people off the streets and reduce the crime rate?


That is a worthwhile question, and while the short answer is “only a little,” its worth going into some details.

New home account for roughly 15% of all RE sale transactions. The dominant transaction is for Existing Home Sales (EHS). At 85%, this is the largest part o f the market by far. So while there was some legitimate capacity built, it was a rather small percentage relative to the railroad tracks or fiber optics I used as an example in the column.

The new home supply created was in excess of family formation, so the inventory amounts to more supply than there is demand. The net impact of the excess building is ongoing pressure on prices.

Think of highly leveraged debt purchases of homes as akin to buying lots of stock on margin — if and when the share price falls, you end up with an asset worth less than the margin call, leaving behind nothing usable, only a debt obligation.


Wall Street analysts and economists have this recession recovery wrong
Barry Ritholtz
Washington Post, July 17 2011

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