Tuesday, February 2, 2016

Housing, A Series: Part 112 - Defaults in the Two Americas

I have mis-spoken.  A few posts back, I made the following observation:
(I)f we look at the housing market, as we should, as two markets - the supply constrained market and the open market - even this idea loses credibility.  Why?  Because home price increases were concentrated in a few cities.  For home buyers in most of the country, there wasn't an unusual level of home equity to draw on.  So, if the crisis was precipitated by the unsustainability of subprime loans, in 75% of the country, those borrowers should have been defaulting well before 2007.
It happens that defaults were higher in some Open Access areas, but in interesting ways.  Zillow has foreclosure information on selected cities.  I want to start with the Open Access cities.  Zillow doesn't have foreclosure data on Houston or Atlanta, so here I will use Dallas, along with Columbus, Charlotte, and Nashville.  The other large Texas metro areas also appear to have followed this pattern.  These are all cities with Open Access characteristics - high population growth and low home prices.

All of these cities had high default rates as early as 2004.  But, it is interesting what we don't see here.  We don't see collapsing home prices.  These defaults didn't lead to systemic losses in subprime mortgage securities in 2004 and 2005.  Housing starts didn't collapse in 2004 and 2005.

And, generally, when the national collapse occurred in 2007, home prices in these cities fell somewhat, but defaults remained relatively level (and somewhat elevated).

This is what a credit boom looks like in an Open Access economy.  In an Open Access economy, it is very hard to build too many houses because of credit expansion.  There have been plenty of households to buy up the housing stock in these cities.  In fact, rents are high, now that we have imposed the bust on them.  In an Open Access economy, credit doesn't lead to a doubling or tripling or quadrupling of home prices, and defaults don't lead to a collapse in home prices.  If the entire country had an Open Access housing market, we could have had a subprime bubble, and default bubble, a building boom, but there would have been nothing that anyone would have thought to call a housing bubble.

Now, it seems that foreclosures remain high even though the subprime mortgage market has been out of commission for a decade.  And, while price changes are imperceptible compared to the Closed Access cities, they were rising slightly during the subprime boom and are now rising slightly with no subprime market.

What do we see if we look at the Closed Access cities?  These are cities where housing prices have never been lower than the highest prices we see in the Open Access cities.  Here, defaults were low from the late 1990s until late 2006, when they rocketed to well above the US average at the same time that home prices were collapsing.  (Be careful of the time-scales in the graphs.) Foreclosures were never high in New York City, although since 2009, this may be because foreclosures are more difficult.

In these cities, foreclosure rates have risen and fallen sharply along with prices.  And, they have had rising prices along with very low foreclosure rates both during the subprime boom and now after it has been collapsed.

So, we have three periods, the credit boom period, the crisis period, and the credit bust period.  In cities that are pure examples of Closed Access or Open Access housing policies, each has characteristics that don't appreciably change between the credit boom and credit bust periods.  And home prices declined in both during the crisis period, but much more in the high priced Closed Access cities.

I had previously included Riverside with "Closing Access" cities and Phoenix with "Open Access" cities.  But, I think it may be more useful to categorize them as "Contagion Cities".  These cities are cities that generally are willing to approve large numbers of new homes, and that have a history of relatively low home prices.

The period from 2004 to 2005 is a deviation for these cities.  Prices rose sharply, not to levels seen in the coastal California cities, but to levels roughly double the typical range for these cities.  These are the cities that saw prices which seem to have been unsustainable, considering their longstanding pro-housing policies.  Certainly, these prices were facilitated by a generous credit environment.  They were also boosted by the real estate capital gains that California households were re-investing, and by the increasing migration pressures from coastal California.  At least in Phoenix, during the bubble period, builders simply didn't have enough permitted lots to sell to all the available buyers.  At least temporarily, there was a wind shear of generous credit and constrained supply that met in these cities, creating a cyclone of housing activity.

Here we see the same crisis behavior that the Closed cities had - sharply falling prices and rising foreclosures, but even more extreme.  Notice that before 2004, prices in these cities were moderate and foreclosures were somewhat elevated - just like the pure Open Access cities.  Then, during the height of the boom and during the bust, these cities looked like Closed Access cities.  In effect, these cities became extreme exurban extensions of the coastal California cities.  Nearly half of Riverside workers commute to the coastal metro areas.  It is common to meet people in Phoenix who telecommute or commute in some way, at least part of the time, to coastal California.

During the credit bust, Riverside continues to look like a light-version of the Closed Access cities.  Phoenix and Las Vegas look more like Open Access cities.  It will be interesting to see if the contagion pushes out to these cities again as recovery ages.

Florida has been a bit of a mystery to me, but I think I was misled by cursory geography.  Realistically, despite the distance, Florida really does serve the same function for the dysfunctional Northeast Atlantic cities that Nevada and Arizona serve for California.  In the Boston Fed report that I recently looked at, there is a table of migration levels into and out of New England.  From 2000 to 2007, net migration from New England to Florida accounted for 62% of all net migration out of New England!

The remaining large metropolitan areas have various patterns that mostly seem to reflect local conditions.  A few cities, like Seattle, are beginning to show signs of housing related costs.  Foreclosures in these cities tended to rise during the bust period, but at the MSA level, there don't seem to be systematic patterns.  Minneapolis had especially high foreclosures, but prices were quite moderate there.  In fact, I had previously included Minneapolis in the list of "Closing Access" cities, but it probably has more in common with other Midwestern cities with moderate prices, or even the pure Open Access cities.

Foreclosures tended to be low before the bust in these cities, because housing starts tended to be lower in these cities than in the high-growth sunbelt cities.  The foreclosures in these cities tended to be more strongly related to falling home prices.

Local issues are important to what was happening in these cities during the boom, and since I believe I have found much evidence on the national level that the collapse in prices was unnecessary, I will probably not be able to give these cities the attention I would like to, since they tend to be more dominated by local issues.


  1. "From 2000 to 2007, net migration from New England to Florida accounted for 62% of all net migration out of New England!"

    -Wow. That's really impressive. I guess this explains a good deal of the rising rents.

  2. Great post. I think this is right, that Phoenix, Las Vegas and Riverside became "suburbs of Los Angeles."

    If we could get rid of property zoning, what we would have seen is a wall of condo-towers along the ocean and much, much, much shorter commutes!

    1. Yep. The strange knack for ignoring any supply side causes at times becomes incredible. One of the cynical comments that I hear a lot is how this whole mess was created because speculators and builders went into a frenzy and built a bunch of houses in the desert. As if the choice of location was just the result of irrational, rabid greed, with no second thoughts or doubts about why, exactly, the speculative outburst would happen in places nobody supposedly wanted to live. Greed and irrationality just explain everything.