CNBC (on TV) just stated that low housing starts was a good thing because it helps us work through the inventory. The reporter also stated that we should be bulldozing houses that are unoccupied. This is not a unique idea, but it is incredibly stupid. It’s called the “Broken Glass Fallacy,” and has been refuted many times by many people. The fallacy goes like this:
Housing prices are coming down because supply is too high. If we bulldoze houses, the housing prices will bottom, and as the market recovers, new builder jobs will be created. This is a net positive for the economy.
The refutation is even simpler:
Someone owns those houses. Those houses have some positive value. When you bulldoze those houses, there is a huge loss in net wealth of the community. Sure, the price of every other house can rise to reflect the decrease in supply, but actual value was on net destroyed. Do we thank the 9/11 terrorists for allowing us to build more planes, skyscrapers, computers, etc? Was the only loss the loss of life? No. That’s ridiculous, even offensive. The destruction of property does not create wealth unless the property destroyed was actually worth less than nothing. That’s possible for condemned buildings, but not for houses that can be lived in.
As far as jobs, every dollar spent rebuilding the bulldozed houses is a dollar not spent elsewhere. We are on net no richer than before (we rebuilt a house that was unnecessarily destroyed). In fact, we are poorer. The dollars spent rebuilding the house could have been spent buying cars, boats, clothes, food, etc. Saving the job of a builder costs the job of someone else.
So, is the decline of housing starts good? Well, it depends on your perspective. Yes, it means that we are going to get to the bottom of housing faster. That’s little consolation to the builder that will lose his job as a consequence. Even though it is healthier for the overall economy to reduce some of the excesses in the housing industry, things are going to be tough for workers in that industry who will be resistant to finding work in a different industry. It’s a tough decision: do you feed your family, pay your mortgage, etc. or do you invest in professional training to find a new job, where you’ll still face a likely pay cut? I doubt most builders had the savings to do both effectively, unless builders are two standard deviations away from the average American in terms of savings.
