A reader writes:
An anecdote. My mother passed away in July, and I'm now selling her house. The realtor we're using is doing 20-30 foreclosures/short sales this year, and he sees lots of economic stimulation because of it. Foreclosed houses are usually in bad shape, partially due to owner negligence, and partially due to being empty for a long time. In any case, these houses usually require a great deal of work once they sell. It's either DIY, which stimulates the nearest Home Depot. Or they're hiring help, which gives work to installers, repairers, etc. The low prices of the foreclosed properties are also a stimulus in a way.
Take my mother's house. We can probably sell it for $250K, but foreclosed/short sales in the area are around $175K. Because the prices are so depressed, the buyers now have the money to spend on refurbishing. They buy for $175, and immediately spend another $40K to fix it up, and this $40K has a pretty big stimulus multiplier. During the bubble, the same buyers wouldn't have any residual cash to spend on furniture, refurbishing, etc. They were cash poor. The money went into the mortgage, which didn't have as high stimulus multiplier. Yes, building a new home is probably a greater stimulus to the economy. But economic models of the past aren't necessarily relevant. Refurbishing 3 million foreclosed homes is bound to affect the gap.
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