Abandoned Capital Projects

From the NPR web site:

A vacant home in a decent neighborhood used to be a rarity. But in cities around the country, homeowners and investors — unable to afford the homes they bought — are abandoning their properties, marring the neighborhoods they leave behind.

The Austrian theory of the business cycle explains how the issuance of credit beyond voluntary savings leads to an unsustainable mix of investment decisions among the various types of capital goods. This process can proceed up to a point until the credit expansion stops and the interest rate returns to a level consistent with consumer preferences, or, if the expansion continues, then costs rise somewhere along the line enough to bring some of the mistaken investment projects into bankruptcy. As part of the restructuring process to bring prices back into line with consumer preferences, partially complete investment projects will be abandoned.

This is what we are seeing in the housing sector. If a home can be thought of as a capital good, which releases a stream of 'housing services' over time, the purchase of a home on credit is a capital investment project. Many people undertook home investments with an incorrect estimate of their future cost of financing, or of the resulting end demand for homes.

Robert Blumen

Robert Blumen is an independent software developer based in San Francisco, California