(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.
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.
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.
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.
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!
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.
"From 2000 to 2007, net migration from New England to Florida accounted for 62% of all net migration out of New England!"
ReplyDelete-Wow. That's really impressive. I guess this explains a good deal of the rising rents.
Great post. I think this is right, that Phoenix, Las Vegas and Riverside became "suburbs of Los Angeles."
ReplyDeleteIf 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!
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.
Delete