Location, Location, Location

If Regional Growth Planning restricted the number of permits as O'Toole asserts, one would expect AZ's ratio of permits to population increase (450k/1M=0.45) to be smaller than TX's (960k/2.7M=0.36). Rather, it is larger. The supply side was not constrained due to Regional Growth planning, at least in AZ.

One does have to look at not just number of permits, but the length of time it takes to obtain a permit, and the length of time from permit to housing occupation. A very long approval process can increase the severity of boom-and-bust cycles, even if permits are eventually granted after a long period of time.

In addition to the lack of restrictive zoning, I think low costs were also a factor in keeping Texas home pricesd low. Cement costs are probably lower here than anywhere in the nation. That's due in part to our large supply of limestone as well as our lack of enforcement of cement plant environmental laws.

Our construction labor supply is virtually unlimited. Crossing the border has been far easier in Texas because we had neither natural nor artificial barriers. The large existing Mexican population in the state made migration to our cities very simple, as relatives and friends eagerly offerred housing to new workers.

Some may object to my state's lack of law enforcement. I certainly enjoyed paying only $85/sq ft for a new home in an uipper middle class suburb.

Charlie Perkins: "Texas has had lots of oil industry related boom-bust cycles in real estate"

While that may be true of Houston, it's not the case for San Antonio, Austin, and Dallas. The majority of large employers in Dallas, for example, are not oil companies. Exxon HQ is an exception. Greater Dallas - Fort Worth has long been home to J.C. Penney, EDS, American Airlines, Southwest Airlines, Texas Instruments, Kimberly Clark, Tandy Radio Shack, and Frito-Lay, as well as many mid-sized companies and subsidiaries of large ones.

Austin and San Antonio are even less dependent than Dallas on the oil industry.

Texas is an oil state, of course. But it is much, much more than that.

As someone who has taught Securities Prep and Insurance Prep classes since 1993, I can tell you that the types of asset backed securities discussed on the Series 7 are CMO's, not CDOS. Ray, if you are anything like the thousands of students / brokers/ agents that I've taught over the years, then you probably forgot 90% of what was covered in class within 30 minutes of passing the Series 7. So your confusion is understood. While I'm working as a stockbroker/insurance agent now, I haven't heard anything about CMO failures so far. But I have to admit that I may have simply missed those articles.

I just finished Michael Lewis' article mentioned above. Very good.

More of an inside baseball commentary than a real explanation of why things sped up and exploded when they did though.

When I did my Series 7 test in 2003, we were taught that asset-back securities such as caused this mess were golden, and perhaps only second in safety to Treasuries.

Of course fully 9 of 10 financial advisors know very little about the product they sell. If Obama makes any new securities laws, perhaps they can require anyone holding a Series 7 to be officially referred to as a "salesperson" so as not to confuse their clients.

I'll research the various land restriction concerns later this evening, but I know for the most part, we've had no problems expanding here in the sandy Southwest metropolis of Phoenix metro.

Lots of desert, lots of room.

Off the top of my head, I do know that AZ was already a growth area before the bubble began. Throw in a large immigration population along with many citizens moving here from other states, a robust job market, etc, and we have foreclosure soup.

Affluent types got caught flipping houses, poor immigrants got in over their heads, junior exec types saw their big chance to catch up to the Jones', and they all got burned.

OTOH, the percentage with negative equity has its own problems-- it biases against states with recent population growth, since older homes are much less likely to be underwater. The number is still important in one sense, but in another way it doesn't say much about how a state dealt with the situation. Similar population NJ and NC have a similar percentage of homes underwater, but NC has had a much larger growth in population recently, so presumably NC scores much better on "percentage of homes built in the last X years that are underwater" where X is less than ten.

BTW, that New York Times graph, while pretty, picks what I think is a bad statistic for the size of the circle-- total number of underwater homes. The percentage, available as a mouseover, is probably more reliable. The circle size means that one has to know the population of the state in order to realize, e.g., that VA is much worse off than NC, which has over a million more in population. NV really should have an enormous circle; its population is still really low, so 48% are underwater.

BoscoH wrote: "And isn't it strange that San Diego, as fast as its grown since 1990, isn't at the top of the problem list?"

Yes, there will be other factors causing prices to fall sharply, or less sharply as I assume is the case you're making for San Diego, but in most cases the economic effects, or poorly designed growth-effects, that cause havoc, will cause more underwater situations in areas where the prices rose the highest. Here is Savannah, appreciation was going along around 5-8%, now it's flat and slightly depreciating by 2% in some areas.

The bubble was a lot bigger in Calif, Fla and Ariz.

Mr. Roberts,

John Thacker seems to have your answer down pretty well.

but I have seen a lot of new, higher end homes, presumably made more "affordable" by easier credit, including variable rate loans with ballooning payments.

There's a lot of that around here as well. The houses are large, the lots tiny. Also a lot of development occurred so far out that extensive commutes became the norm for a lot of people. There was a lot of complaining when gas prices were up.

People began snapping up homes because they likely thought prices would keep rising ...

That's the "bubble" theory, and it's presumably also part of the story, but it doesn't explain what I see in my part of the country. I haven't seen existing house prices double or triple in the last five years, but I have seen a lot of new, higher end homes, presumably made more "affordable" by easier credit, including variable rate loans with ballooning payments.

Mike wrote: "I think it's because these are the areas with the highest price increases during the run up in prices."

Actually, in SoCal, Riverside county, and especially towns like Lake Elsinore, are spillover from the more expensive and crowded Los Angeles and Orange counties. There were lots of people who would buy in Riverside because they could afford a nice home, then commute to Los Angeles or Orange. From Lake Elsnore to the OC, you can take a windy and dangerous Ortega Highway to the 5, or you can take the 15 north to a crowded 91 west. Either way a horrible commute, but one that thousands made daily because it let them have a great home and a good job.

Strangely, long before the Riverside housing boom, there was the controversy over the 91 toll road. It ends at the Orange/Riverside county line because back in the early 90s, the Riverside county pols opposed the whole idea. The OC has a network of toll roads that keeps traffic moving, while Riverside freeways slow to a crawl. There had also been talk about a toll tunnel cut through Saddleback mountain, but the OC is against it because of all the Riverside county traffic it would dump in south OC.

So I blame Lake Elsinore on the road situation. While the city probably grew up with people envisioning it as a suburb of OC, it's better connected to San Diego. And isn't it strange that San Diego, as fast as its grown since 1990, isn't at the top of the problem list?

Take, for example, the planned MetroWest near the Vienna Metro stop. It's an idea to create a high density housing complex near the Vienna stop; seems reasonable to Smart Growthers. However, the plan was delayed for several years because "[i]in an effort to decrease reliance on the personal automobile and encourage the use of transit, ridesharing, telecommuting, bicycling, and walking the Fairfax County Comprehensive Plan provides that Pulte Homes implement a Transportation Demand Management (TDM) Plan."

MetroWest was approved of and supported by the Smart Growth Alliance. Yet that actually has made its planning process take longer than other developments. Smart Growth sabotages itself.

O'Toole especially has a remarkable ability to use the word "zoning" to mean only Smart Growth type regulations (i.e., mandating minimum densities), while ignoring the far more prevalent form of traditional zoning where you limit density by way of maximum occupancy zoning rules, minimum lot sizes, and (perhaps most importantly) minimum parking requirements.

I've seen O'Toole attack those requirements well. The problem is that the constituency for "traditional zoning," as you put it, is so strong that there seems to be no way to remove it (though it can be stopped before it begins, as in Houston.)

Smart Growth advocates talk a nice game about encouraging density. But everywhere I've seen, they have a lot more success in stopping sprawl than they do in encouraging density. They end up having to compromise with "traditional zoning" advocates, and the end result is that little gets built and everything gets slowed down. The same rules that are used to prevent low density housing from being built end up being used against high density housing as well.

Partially this is because Smart Growth advocates realize that in the absence of regulation, there would be some additional high density housing but also more sprawl as well (again, see Houston), and some hate sprawl more than they love more high density housing.

As a note: be very wary when reading things written by O'Toole, Cox, or other "libertarian" land use experts on the current crisis. O'Toole especially has a remarkable ability to use the word "zoning" to mean only Smart Growth type regulations (i.e., mandating minimum densities), while ignoring the far more prevalent form of traditional zoning where you limit density by way of maximum occupancy zoning rules, minimum lot sizes, and (perhaps most importantly) minimum parking requirements.

I don't know if this TOTALLY explains anything, but I do remember that Flori-duh was one of the big hotspots for second homes a few years back. I'd assume the southwest would also be so. Perhaps it's just suffering the consequences of being the "marginal" home for so many people?

Land use regulations are quite clearly relevant.

For some further evidence look at these two maps of England. This is the "green belt", the areas of England where development is covered by very strict regulations.

http://www.magic.gov.uk/staticmaps/maps/gn_belt...>

Here is a map based on estimates of places at risk:

http://www.thisismoney.co.uk/mortgages/article....>

The big exceptions in these maps are London and Cambridge. Both of those areas have green belts but are not in the at risk category.

However, both of these areas are extremely expensive. In those places subprime is rare, renting is more common. In those places the landlords are the ones currently having problems.

"First time I've seen that."

The "Bank Owned" sign that is.

Martin, Does not this:

And why is that? Cheap credit has something to do with it, but it's not the whole story.

Help explain this?

More people perceiving that they can afford these homes, and more builders perceiving that more people can afford the homes, while much of the perceived wealth is a house of cards.

----------------

It's tough to understand how a "housing crisis" focused on low income borrowers in low income communities, targeted by the CRA, could result in a builder of luxury homes seeing a forty percent drop in revenue.

A lot of low cost condos in our neighborhood zoomed way up in price, like 2 or 3X. Of course, the more expensive homes went up as well. People began snapping up homes because they likely thought prices would keep rising and if they waited, they might end up being priced out of their target home set. After the boom ended, a lot of those condos began sporting FOR SALE signs. I saw a sign yesterday the said "Bank Owned".

The house next to us, owned by a real estate "wealth builder" went on foreclosure sale last month. It was priced about $515K.

I suggest that easy credit drove up demand across much of the market.

First time I've seen that.

Luxury home builder sees revenue plummet. It's tough to understand how a "housing crisis" focused on low income borrowers in low income communities, targeted by the CRA, could result in a builder of luxury homes seeing a forty percent drop in revenue. Maybe the bottom falls out of the luxury home market after the bottom falls out of the trailer trash market, because the presumptive buyers of luxury homes lent to the trailer trash?

Again, for the record, I use "trailer trash" here facetiously, not disparagingly. I've always chosen housing below my means, and my sister lived in a very trashy trailer for years. She was also valedictorian of a class with several hundred students. She chose to live in the trailer rather than go even deeper into debt to build the veterinary practice and buy the small farm she wanted.

As an aside, pushing development further out also increased traffic problems, a readily foreseeable consequence which gives the lie to the stated motivations of the slow-growthers.

I'd say that some slow-growthers and smart-growthers are honest in their motivations. But they're never numerous enough; they start the planning process, and homeowners use it to prevent all increase in density rather than encourage the smart growth.

Many smart-growthers do actually want more urban density and less sprawl. Without zoning, there would be somewhat more density, but also sprawl, because people like suburban living. The only way to prevent sprawl is to create the type of restrictions that also ends up being used to prevent higher density housing. Smart-growthers are never able to get a majority for their higher density dreams, and they themselves are vulnerable to arguments about how regulations and EISes and everything else are necessary, slowing down development. Political realities mean that all that the smart-growthers can do is prevent sprawl, not encourage the high density housing that they'd want.

The counter example that leaves land use regulations as the only reasonable answer is Texas.

And North Carolina, as another example. Those states would seem to argue against Charlie Perkins's theory, among others. (Texas has no state income tax either.)

Worse than ordinary zoning is regional growth management planning. Normally, even though homeowners start restricting building and increasing density in order to preserve their property values, people can still build further out in areas still rural. But in California since the 1960s-- Florida and Arizona since 1985 and 1998 respectively-- has had regional growth-management planning that allows urban areas to prevent surrounding rural areas from allowing more housing. See here. See also the papers of Ed Glaeser at Harvard.

Certainly an area can be hemmed in by having no free rural land available for development at all, and that can make a housing bubble more likely. But in many of these cases, it's more regional and state government preventing the rural areas from allowing development.

Not that rural sprawl is the only way to increase the housing supply; there's also the option of doing it inside an urban area. However, homeowners and zoning tend to prevent that-- just look at Georgetown in DC.

I would read War On The Dream by Wendell Cox.

I have no idea how you would go from zoning regulations to the subprime crisis

Suppose you have a market with a steadily growing demand for houses and no zoning. With no constraints on the supply side, houses will sell for the cost of construction plus land price. If you then introduce restrictive zoning, the equilibrium price for any particular house will go up. In the Northern Virginia DC suburbs, for example, prices increased as local governments and our congressman imposed high costs on developers who wanted to build high-density housing near Metro stations and in other close-in locations. New development was forced further out and existing housing which was not as far out became relatively more desirable. (As an aside, pushing development further out also increased traffic problems, a readily foreseeable consequence which gives the lie to the stated motivations of the slow-growthers.)

So when building restrictions are first imposed, you should expect to see prices for existing homes trend up for a time until they reach a new equilibrium, and then level off, or at least slow down to a new steady-state upward trend due to the continual increase in relative desirability of close-in housing. Naive observers looking at the market as this adjustment was taking place came to believe that house price inflation was a fact of life, and so did lenders. Flippers were getting rich, fueling even more speculative demand. And thus the bubble.

In areas where building restrictions were few, like Houston, the bubble never got off the ground, as higher prices immediately called forth a greater supply of housing which moderated the price increases. People living in those markets did not see their neighbor getting rich by flipping houses, so the speculative demand was absent.

The counter example that leaves land use regulations as the only reasonable answer is Texas. No bubble, no bust. Steadily declining defaults over the last 2 1/2 years per RealtyTrac.

Texas was a high growth state, yet Dallas only registered a 3% annual gain on the Case-Shiller index. Prices, statewide, stayed low. Texas has low land-use regulations. The only exception is the pricier Austin area.

Texas is majority minority and has a higher percentage of low income people than California. This negates the sub-prime explanation.

Falling prices lead to more foreclosures. If your home hasn't lost value there is a strong chance you can sell the house and cover the loan. If you're $100K underwater, what's the point? Walk away.

Russ,

Great question. I vote for randomness until I see a convincing explanation.

However, I do not follow the full premise of your post. You ask why SUBPRIME is focused on these four states. The article, and the data, involve all mortgages, not just subprime (as far as I can tell).

The Martinez example in the article shows that even with a normal 20% down payment he would be sitting on negative equity. This is not a subprime issue. So it may be that negative equity is concentrated in those markets which saw the most housing activity right before the market turned sour.

I don't know either, but the picture in the article you link reinforces my presumption that the "housing crisis" is not limited to, or even primarily a matter of, low cost housing for low income borrowers. My personal experience also doesn't support this idea. Maybe the CRA is part of the problem, but it's not the whole problem or even the root of it.

The stalled housing development projects that I see are all on the high end of the market. Two developments went up near my parents' house in North Carolina over the last few years. A modestly priced development sold out quickly. A high end project just down the road has been a financial disaster for the developers.

In Athens, Georgia, I'm looking now at beautiful, huge Victorian townhomes in the half million dollar range. The development is new. Most of the never occupied homes have stood empty for well over a year.

From the article: "The average homeowner in Mountain House is 'underwater,' as it is known, by $122,000."

The average homeowner in this community owes $122,000 more than his house will fetch. I owe nothing on my house, but the entire house isn't worth $122,000, so these people presumably live in houses worth three or four times what my house is worth. Average homeowners in the Mountain House community, living on Prosperity St., are low income trailer trash who only received mortgages because Barney Frank pressured Fannie Mae to extend them credit they couldn't repay? I doubt it.

I suppose instead that many "subprime" mortgages were "subprime" because they exceeded the Jumbo Mortgage limit, and these homes weren't simply "inflated" in the conventional sense, i.e. the prices weren't simply higher nominally, with nothing of real value behind the higher price.

The pricer homes were newer and actually were more costly to build, because they were bigger and had more and more costly features, brick exteriors, hardwood floors, high, recessed ceilings, large kitchens with large, granite topped, island counters, large bedrooms, a bathroom for every bedroom, large bathrooms with large, granite whirlpool baths, large, double garages, larger lots.

In other words, the housing crisis is not just a lot of credit extended to transient trailer trash who should be renting. It's malinvestment in the housing sector, more of the more costly homes than the market can really absorb.

And why is that? Cheap credit has something to do with it, but it's not the whole story. Another part of the story is increasing wealth and income concentration. More people perceiving that they can afford these homes, and more builders perceiving that more people can afford the homes, while much of the perceived wealth is a house of cards.

Still another part of the story is population aging. The number of people nearing the end of their wealth accumulating life cycle has never been so large, and relative to the larger population, the number may never be so large again.

Population aging also helps to account for the cheaper credit, because these people accounted for much of the demand for mortgage backed securities, real estate investment trusts and similar investments, either individually or through their pension funds.

When common people retire, they often move out of large, family homes and into more modest homes befitting their decreased need for space.

What do CA, NV and FL have in common? One thing that jumps out at me is "retirement spot". Builders expected to sell these homes to wealthy retirees migrating to these areas, but many would be retirees are reevaluating their plans about now.

Why these areas? My stab at it:

1. AZ, FL, and NV had low cost land in the timeframe of about 2000-2005 (Land an hour or two from the SF Bay Area had relatively cheap land). Census Bureau Population Change Data indicate many people find theses areas pleasant ones to live in. Quite a bit different from rust belt communities, cold climates, and the humidity in the Southeast.


2. As an added bonus, Nevada has no state income tax.


3. People from California moved to AZ and NV (from the Northeast to FL?) They sold very expensive real estate and purchased large, relatively inexpensive homes with the sale proceeds.


4. This created jobs for people with some knowledge of the real estate market: RE agents, mortgage brokers, contractors, etc. More RE workers put even more pressure on the demand side of the housing market as more and more workers moved in.


5. When banks looked at these areas, they saw real estate appreciation which meant that their loans' Loan to Value ratios were getting better/safer. This encouraged lenders to make loans with no down payments and Interest Only and negative amortization EVEN TO INVESTORS [the folks in #4]. Zero down investments with low monthly cashflow requirements (I.O. and neg. am.) are investor magnets. The kinds of folks who are comfortable investing in real estate are people who work in that field. To further add fuel to the fire, people from all over the country were investing in AZ because of the appreciation history. Was anywhere else in the country seeing these kinds of loans offered to investors?


6. Because so much money was easily available for purchasing, the prices continued to go higher further assuring the banks their loans were "safe". Speculators could "always" sell at a higher price (or do a cashout refinance), as could anyone in financial trouble.


7. Of course, as the bubble burst, many of the real estate related workers moved away.


8. Perhaps a tiny impact was from legislation in AZ aimed at employers who hired illegal aliens. This caused many families to move back to Mexico or to other states at just about the time the bubble burst.

Charlie Perkins

Prescott, AZ

Steve Sailer has an impolite theory why those are the four states most responsible for the crash.

I would guess that those 3 states would have a lot of speculative properties, or where people were trying to flip newly constructed housing. People may have been guessing where the next "prime" locations are in those 3 states would be and guessed wrong.

The answer may be found in the article "The Dog that did not bark" by Randall O'Toole and published in Liberty, magazine in the late spring.

Basically he found a very good corellation between extreme land use restrictions and failing mortgages.

The short answer is, is that buyers and lenders expected property values to keep inreasing -- that there wouldn't be negative equity. That this would allow people like the Martinez's a way to refinance the loan he and his wife took out on the home. Expectations like that, when they're not met, can be brutal for both parties.

But the forgotten man in all this is the poor shlub who purchased the debt instrument from the lender. S/he expects to be repaid that money in the end and have interest payments made along the way for the use of the capital. Rather than bailout the banks to supposedly unfreeze credit markets, we should have entertained the idea of lowering the tax levied on interest payment recipients to zero. Is it any wonder that Americans don't wish to save when the interest is taxed at the income tax rate. And how do after-tax returns on purchased debt instruments keep up with inflation is these situations? The disrespect that we show to those who provide lendable funds in our credit markets is astounding; it's probably rooted in class envy, that somehow those who lend to us are well off anyhow and are there to take care of the wants of those who have less (and wish to borrow).

Aren't those the States with the worst zoning regulations?

I have no idea how you would go from zoning regulations to the subprime crisis, but that seems like a worthy lead doesn't it..

Professor Roberts--

Read the new Michael Lewis article on the mess at Portfolio.

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page9

You'll learn that on on wall street these states are called the sand states.

In the case of California, one factor is the simple fact that the subprime loan and the important liar loan variant were both invented and perfected in Southern California.

This might also explain Arizona and Nevada.

What about Florida? Can't tell you.

The Las Vegas area is ringed with government lands. Due to these lands and other restrictions, the ability to develop new housing in this very fast growing city is limited. I think this makes the supply curve steeper - small increases in demand drive prices up really fast, but also drive prices down really fast for small demand drops. I would think this would be exactly the opposite of, say, Houston or Dallas, with fairly flat supply curves. No big runup, no big drop off.

It would not surprise me at all if parts of California operate the same way. But I think the California example is a different example. In this case, this area is just one piece of an integrated market, and might be considered on the least desirable end of the distribution. My sense for that county in CA is that is the marginal area of growth. When demand is high and infill opportunities run out in other parts of LA, that Riverside corridor grows fast, but it also is the first to drop off when demand falls.

Don't know about Ft Meyers. Visited there last year and, personally, its about the last place on Earth I would live.

One factor is simply the fact of where the companies were located that invented and perfected subprime loans and the famous liar loan variant.

The home of most of these companies was Southern California -- SoCal is where they pioneered and perfected this business.

I believe CA has a non recourse home loan law on the books that allows a borrower to walk away from a mortgage with immunity to their credit and assets should they ever default on the property. Banks can repossess the home but if the current home value does not cover the note the bank has little they can do to the borrower. Delusional is the best word I can find for it. I wouldn’t be surprised if Arizona, Nevada, and Florida were also non-recourse states.

I think it's because these are the areas with the highest price increases during the run up in prices -- They were so far out of line with the rest of the nation, prices took a much bigger plunge in these area. There was much more specualtion going on in these hot markets. Those who bought at the top saw a much bigger decrease than, say, someone in Tennessee.

Interesting.

And when going by % of homes under-water, Nevada and Michigan are the tops.

I would speculate that Michigan is simply feeling the indirect effects the most because of their other existing economic problems. Their economy is so weak, that even "non-bubble" homes are probably going under the water mark these days.

I'm writing this from the Phoenix metro area, and we've noticed that neighborhoods less than 10 years old are outwardly nice upper-middle class suburbs, but you go in these areas, and they have all of the problems of low-rent neighborhoods. Cars stolen, you can't leave your garage open even in daylight without the kid's bike being stolen, etc.

I live in a neighborhood that is upper-middle class, but about 16 or 17 years old, and it's still a very nice, quiet neighborhood. No crime, the garage can be left open all night if you want.

You have to drive about 10 miles to find one of these noveau-neighborhoods, but the geography itself isn't that different and the homes are similar enough that if you're new here, you couldn't tell the difference. But we have none of their problems, and while we do have some foreclosures, they're no where near as bad as other neighborhoods.

I've heard--I forget where--that it has something to do with...ahem...undocumented-Americans.

Can't remember the argument behind it. Anyone?

I'd always just assumed it was because those areas had the most new development that was the most highly biased towards the sorts of single-family residences that government homeownership programs promote

Doesn't this go back to flatland and zoned zone? I'm sure that's not the whole story, but I bet it's a big part of it. Though, I guess that zoned zone is prone to bubbles is still a far cry from why zoned zone is prone to bubbles.