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Can you still own a second home in this economy?

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Alan Diaz/AP

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Real estate prices are suffering in Baja, Mexico. This article from the LA Times tells a story of half finished ocean side condo buildings sitting next to each other and it looks like a ghost town. While I have never been there, I doubt that people want to buy in this area because of proximity to jobs. This beach community is all about fun. As the 2008 crisis hits, people cut back on such fun and the whole community scales back.

The interesting thing here is the consumption externality. Suppose that I want to live close to the beach and eat dinner each night at a fancy restaurant. There is fixed cost to setting up a fancy restaurant; the chef's salary, the rent. Suppose that I have a good job and even though we are in recession I can go to this restaurant and pay my bill but suppose that everyone else in the town is broke. I am just one guy and I don't order enough at the restaurant to single handedly keep them in business so the restaurant goes bust. I no longer like vacationing in this town. Yes, my condo is still next to the beach but I have nothing to do at night because the other wealthy people are no longer wealthy and thus not demanding the products --- without their aggregate demand -- the nightlife and local economy collapses and this diminishes my consumption opportunities.

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So the funny thing here, is in a world with fixed costs of running businesses --- there is a co-ordination problem; the wealthy need other wealthy people to remain wealthy and living close to them because in aggregate they have enough purchasing power to allow nice shops and stores to flourish and this creates a great "consumer city". The beach (while God Given) is not sufficient to have a paradise. This is an interesting example of a chain reaction. How does this Baja recover? The end of the recession would help but second homes are a leading indicator of "cutting back".

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