Debt Deflation

Chris Beggy news at kippona.com
Mon Jul 29 10:37:52 PDT 2002


Michael Perelman <michael at ecst.csuchico.edu> writes:


> Regarding the reluctance to sell housing at deflated prices, I think that
> this is more true when the house is the primary source of wealth.

I lived through a residential real estate bust in Houston in the early 1980s. Most people decide they can't afford to sell when the selling price plus transaction costs drops below the balance on the mortgage. Nobody wants to pay (and many can't afford to pay) the bank $10,$15,$20K so someone else can buy his home. When enough mortgage payers are in that position, transactions dry up in a geographic area.

That puts a floor on the price drop...until the personal bankruptcies and mortgage defaults start to kick in. Then people just walk away and mail the mortgage holders the keys. The lenders are eager sellers, and market clearing prices are discovered.

Chris



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