Looking at the Long Depression, the Great Depression, the Japanese Depression, the Great Recession and contrasting that to shorter episodes including Korean Armistice Recession and the Dot-Com recession I am starting to speculate that the key sticky price is land or real estate more generally.

Not only is there of course a strong association between land bubbles and the size and scope of a recession but real estate appears to be very very sticky in transactional price, more on that. And, there are some strong reasons why one would expect it to be.

So real estate prices move relatively slowly. We know that. The “bursting” of the housing bubble was a three plus year event that may not have ended yet.

However, even that grossly overstates the speed at which the market actually comes to equilibrium. The volume of transactions collapses during the burst and both market and shadow inventory builds up. There are units which buyers would like to sell but are not willing to lower the price on – why?

We all know this phenomenon. People even going so far as to take a house off the market and wait until a better time to sell. This is fantastic price stickiness. Between waiting to put on market, waiting for an offer, attempted buy and holds, etc a decade could go buy before a single property clears to its equilibrium owners at its equilibrium price.

Now why would we do this? Part of it could be sticky mortgages of course. But, I am starting to think that’s not it. Part of it could be irrationality, but then its hard to see how vulture capital funds could be profitable by buying and holding.

What I suspect it is, is a fight over agglomeration rents. The last one to sell out takes the rents and each player is holding on to be that individual.

Imagine an extreme case. An entire neighborhood goes into foreclosure and everyone is kicked out.  The banks sell off the properties to investors who simply pay a portion of the amount owed on the mortgage. You might think we have cleared the market and everything can go back to normal.

But, no we see neighborhoods where the houses stand empty. What’s going on. Well, a house in an empty neighborhood is worth less than a house in a full neighborhood. In fact, each family to move into the neighborhood raises the value of the neighborhood.  However, to get the first family in you have to offer a price equal to the value of an empty neighborhood.

No investor wants to be the one to do that. Each one wants to be the very last investor to sell, the one who sells into a full value neighborhood. However, since they can’t all be last and one must be first, there is a standout.

The lack of credible communication between investors only makes this problem worse. The best they can do is just hold out for as long as they can hoping to get as much as they can.  This causes an extremely slow movement towards equilibrium.

Most cases aren’t this extreme. However, home owners have the same sense. They know that selling in a down market or at a “bad time” is different than selling at a “good time” They are reluctant to be the first to take loses.  As more potential sellers pile up each one is hoping that he or she will be able to out last the others; to sell after the market has bottom out and is on its way back up.

Questions to be answered:

If this is the origin how does the disruption spread throughout the economy?

The non-housing related busts were fast in (korea, dot-com) were quick and shallow respectively in GDP terms but not in job terms, how do we square that?

How does this tie into the rational inattention and stickiness literature?

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