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July 20, 2009

Construction permit bonds

I learn in today's WSJ (The Oldest Established Permanent Temporary Sheds of New York*) that builders sometimes leave their construction sheds (the scaffolding that protects those below from falling debris) in place when they go bankrupt during construction busts. This should be a simple thing to prevent. When you get your permits you have to put up a bond that covers the cost of taking them down. When you show you've taken them down you get the bond back. Otherwise the state takes the money and tears it down itself if they when the construction permits expire. Until then, the money is put into a FDIC insured asset or treasury bonds and the permit holder gets all interest net of inflation. The proposal would be administered by a independent body to prevent the city from using the money for unrelated purposes.

I began thinking about an idea like this when I read in the times about the bulldozing of america’s shrinking cities, where cities with falling populations are often beset with abandoned houses that attract all sorts of problems and so the cities work to tear down these abandoned houses. It shouldn't be hard to put together a financial product that provides cash to shrinking cities to tear down abandoned homes. Given that most cities have increasing populations because the human population has continued to expand, it isn't a significant problem that most cities will ever face. Most houses will either be repaired or torn down and replaced for as long as humanity sticks around. Tearing down a house costs about $8,000 a house. The cost of bulldozing a house 50 years after it is built would add between one and two thousand dollars to the cost of a house even if all houses were to be demolished with certainty, which it would not. We know that housing demolition is generally a counter cyclical phenomena, so construction resources are available and modestly priced. There are about 50 cities demolition on this sort of scale is being discussed and only a small fraction of the homes would be demolished even if they were free. There are something on the order of 500 cities in the USA (100k population or more). So at the very most it seems on the order of 5% of houses will eventually be abandoned and require the government to demolish them. So for about 50 bucks added to the price of a new home (and a one time levy on all existing homes) we could ensure that this isn't a problem ever again. Again, the independent body similar to the one discussed above would create standards to declare the house abandoned and keep the funds in safe reserve from tempting politicians who might use it to meet unrelated expenses.

*-I wonder if that title is a reference to The Oldest Established (Permanent Floating Crap Game In New York), a song from Guys and Dolls.

Posted by OneEyedMan at July 20, 2009 5:27 PM

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