The wrecking-ball response

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Tumbling house prices in America, rising foreclosures and a glut of unsold homes have produced a variety of unusual, even desperate, responses from policymakers. Of the 129m housing units in America, 18.6m stand empty. At 2.9%, the home-owner vacancy rate, which measures the share of vacant homes for sale, has reached its highest point since measurement began in 1956. At the end of the first quarter there were 2.3m empty homes on the market, a rise of more than 160,000 from the end of 2007. There is a vicious circle: the huge number of houses on the market pushes home prices down, and as prices decrease, mortgages become harder to refinance, leading to more foreclosures, vacancies and so on. The more homes are on the market, the less chance that prices will stabilise.

The announcement on July 8th of a steeper-than expected 4.7% drop in pending home sales in May dashed any hopes of a quick turnaround. In cities such as Atlanta and Charlotte, formerly vibrant neighbourhoods have taken on the dilapidated air of ghost towns since the subprime crisis. Municipal taxes go unpaid, and boarded-up homes invite looting, drugs and other criminal activity. In one near-abandoned Atlanta neighbourhood, speculators who could not sell homes even paid homeless people to occupy them. Cleveland and Baltimore have filed lawsuits against subprime lenders this year, claiming their practices cost the cities millions of dollars in lost taxes because of lower property values. These cities are exploring another bold solution to the surplus of vacant houses: demolition.

In prepared remarks for a speech earlier this year, Ben Bernanke, chairman of the Federal Reserve, praised programmes that seek to demolish the most ramshackle units in order to “mitigate safety hazards and reduce supply.” Unlike mortgage bail-outs, this policy does not encourage risky lending. However, it requires cities to spend money on demolition merely to lose money through reduced taxes.

Congress is debating more complicated solutions. The mortgage-rescue plan crafted by two Democrats, Christopher Dodd, the chairman of the Senate Banking Committee, and Barney Frank, the chairman of the House Financial Services Committee, aims to help as many as 400,000 people stay in their homes with more manageable mortgages—at a cost of $300 billion.