Is bulldozer the best option for some boom-time housing?

Douglas Duncan, vice president and chief economist for Fannie Mae, raised a provocative idea this morning at a meeting of real estate journalists in Austin: Some of the misconceived housing developments built during the boom years might have to be torn down because they don’t make financial sense.

Duncan agreed with Stan Humphries, chief economist at Zillow.com, who warned that a “tremendous shadow inventory” of homes is poised to come on the market. That includes future foreclosures (due to negative equity and continued high unemployment), homes that will end up in foreclosure after a failed loan modification, and homes from what he calls “sideline sellers” who have been biding their time until markets improve. According to Humphries, home prices won’t bottom out until the third quarter of this year, leading to “the second phase of the housing recession”: below-normal price appreciation for several years. (The long-term appreciation norm is 3 to 5 percent per year.)

Said Duncan: “Some of that shadow investment could have to be torn down. It was not economically viable when it was put in place.” That include some boom-time developments in California’s Inland Empire and central Florida. Duncan said people could find that the cost of sustaining their lifestyle in some developments–including high transportation costs to far-away jobs–is greater than the cost of the home. That would wipe out demand.

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