Raising Sand

Michael Barone:

What do these states [California, Florida, Arizona and Nevada] have in common? First of all, high population growth through most of this decade, if not in the entire state than in major metropolitan areas—the Inland Empire and the Central Valley in California, the I-4 corridor in Florida, metro Phoenix in Arizona, metro Las Vegas in Nevada. This stimulated a demand for housing and rapidly rising house prices that rose to huge bubble dimensions, then crashed when the local economy began to falter (as gaming receipts did in Las Vegas in 2007, for example). Second, large numbers of Hispanic immigrants. Lending institutions had incentives under our laws to lend to minorities, and they had a ready market to offload those mortgages in Fannie Mae and Freddie Mac. Third, local economies that became overdependent on construction and real estate, so that when the bubble burst there was not much to fall back on. I have seen estimates that something like one-quarter of the metro Phoenix economy was in construction and real estate.

All of this tells us that the foreclosure problem is more a local one than a national one. It was caused by the peculiarities of local economies and demographies which, combined with the effects of government regulation, had powerful effects here but very limited effects elsewhere.

The foreclosure problem elsewhere is the typical problem you encounter in a recession: when people get laid off, they have a harder time paying off their mortgages. There are policy arguments for some kind of amerliorative laws to staunch the pain.

But in the Sand States the problem is different. Housing prices in Phoenix, for example, roughly doubled between 2004 and 2007 and now are back to 2004 levels. Can we, or should we want to, pump them up to 2007 levels again? The answer to both questions, it seems to me, is no. So we will just have to deal with the problem created by the fact that these mortgages were commingled into mortgage-backed securities with those from other areas which are much less likely to result in foreclosures.

Not having access to the full report cited by Barone (I can't get the RealtyTrac page he links to to open for some reason), I think there's another factor here that he doesn't touch on, namely speculation in condominiums. I won't try to speak to California or Arizona, but anybody who's spent time in Florida or Las Vegas can tell you that both places are fairly sinking under the mass of new condominium construction from the past decade or so. Even backwaters like Panama City Beach are bulging with new thirty-storey concrete monstrosities, sold off a condo at a time, often sight-unseen, to absentee owners, few of which were interested even in renting the properties; they were in it for the flip.

When the flips went away in the real-estate crash, thousands and thousands of those condos went into foreclosure. No "recovery plan" is going to be able to wash out all that bad debt; you're talking about decades rather than years to resolve this disaster of speculative overbuilding.