What the foreclosure data teaches us

Michael Lewyn's picture

I recently finished reading Foreclosing the Dream, by William Lucy. The most interesting parts of this book are the first chapter and the last appendix, both of which tell us where foreclosures are (or at least were in 2008, before the foreclosure crisis morphed into an international economic downturn). These figures seem to me to debunk at least a couple of the more popular explanations of the foreclosure crisis, such as:

Myth 1: "Its all the fault of too much lending to the urban poor."

Fact:  In the states most affected by foreclosures (such as California and Florida) "drive to qualify" middle-class outer suburbs had far more foreclosures than urban counties. In Northern California, only 0.2% of San Francisco's housing units were in foreclosure or preforeclosure status, as opposed to 3.3% in Contra Costa County and 3.7% in Solano County. In fact, San Francisco had the lowest foreclosure level of any San Francisco-area county. Alameda County (which includes Oakland) had a less impressive 1.8% foreclosure rate- but even that rate was below not only the suburban counties mentioned above, but the statewide average of 2.5%. Similarly, in Southern California, Los Angeles County's 1.4% foreclosure rate was far below that of drive-to-qualify Riverside County (4.4%) and San Berardino (4.0%).

And in South Florida, only 1.1% of housing units in Dade County (the most urban-like of Southeast Florida's three not-very-urban counties) were in foreclosure/preforeclosure status, as opposed to 3.9% in neighboring Broward County.

(Sort of) Myth 2: "Its all of the fault of high housing prices."

This is not a complete myth, which is why I call it a "sort of" myth: most 2008 foreclosures occurred in just four states (California, Florida, Neveda, Arizona). All of these states had median housing value/median family income ratios above the national average- almost 8-1 in California, 5-1 in Neveda, 4-1 in the other two states.

But other expensive states, mostly in the Northeast and Pacific Northwest, had comparable housing/income ratios and much lower foreclosure rates. For example, in New Jersey, 2007 housing prices were 4.6 times family income. Yet only 0.4% of housing units were in foreclosure/preforeclosure status, below the 0.8% national average.

If uses changes in housing/income ratios over the 2000s (to distinguish between places that became expensive more rapidly and those that were always expensive), one finds similar results. The "Big Four" states had increases ranging between 57% (Arizona) and 97% (California)- among the highest in the nation, but not significantly different from low-foreclosure states such as New Jersey (76%), Rhode Island (68%) or Maryland (75%).

So what does make these four states different from all others?  Anyone want to explain?

Michael Lewyn is an assistant professor at Touro Law Center in Long Island.



Michael, 'Myth 1: "Its all

'Myth 1: "Its all the fault of too much lending to the urban poor."

Fact: In the states most affected by foreclosures (such as California and Florida) "drive to qualify" middle-class outer suburbs had far more foreclosures than urban counties.'

Yes, but the people driving to qualify were mainly the urban poor.

'In Northern California, only 0.2% of San Francisco’s housing units were in foreclosure or preforeclosure status'

San Francisco is not a very good reference point for an argument relating to the "urban poor." Your statistic would work better as support for a claim that foreclosures have not affected the urban rich.

Final paragraph:
'The "Big Four" states had increases [in housing/income ratios].... among the highest in the nation, but not significantly different from low-foreclosure states....

So what does make these four states different from all others? Anyone want to explain? '

I won't claim to have the ultimate explanation, but I would offer for a start that "Big Four" states had much higher production of new housing than the low foreclosure (but also similarly unaffordable) states. California, Nevada, Arizona had much more available land as well as land use policies supporting greenfield growth than New Jersey, Rhode Island, Maryland.

REAL over-supply and illusory over-supply

The problem is worst when, regardless of how much "supply" there SEEMS to be, land prices at the fringe are inflated by an unusually significant margin over historical norms (usually rooted in the value of agricultural land plus development costs).

This can be because of an Urban Growth Boundary, geographic obstacles, constraints on water supply, or a government monopoly owner of all or most surrounding land.

If "ease of supply" IS a problem, Atlanta, Georgia illustrates it. So much "supply" that "median multiple prices" go DOWN, NOT UP.

Take a look at the average value of a mortgage foreclosed in Atlanta and compare it with any of the cities where there are the effects on fringe land prices that I describe. Atlanta's crisis is based on unemployed solo mums getting $80,000 mortgages they could not service; in parts of California, the crisis is based on mortgages of around $1,000,000 that even yuppie couples could not service.

The "oversupply crisis" that Atlanta represents need not make the USA economy even blink. It is constraints on supply, highly inelastic supply, and PRICE inflation, that are the problem. "Supply" coming TOO LATE in the "increased demand" phase is also starting to be identified as a significant source of problems. In fact, in Britain, "supply" is so slow, thanks to regulations, it only ever starts to "wind up" AFTER the bubble has burst.......! Hence the building development industry in Britain has shrunk for decades now, and actual shortage of homes is in the millions.

"Big Four" partial explanation

That these statistics occurred during the Meltdown and subsequent Big Banks & Brokerages Panic of '08, I think is indicative of the different type of buyer in those 4 States = "new", "new to the US" or "new to Money" buyers, which only existed in small numbers in the lower States.

Many CA, NV or AZ buyers could fit into either of those 3 categories because of immigration from Mexico or SE Asia or migration - retirees moving to the Sun Belt. With the frenzy to sell more mortgages from the London and German banks, more and more houses were being built in So CA and NV which put both States' building industries awash in cash which spread out to even the lowliest landscape worker, allowing them just before the "end" to buy a house with a "doctored" mortgage rate. While FL, I am guessing, was mostly because of in-migration of retirees. In the Deserts of CA, AZ & NV, as with FL, the retirement accounts of the close-to-retirement folks were fairly fat and the value of their home was generally "high". The combination thus enabled them to "invest" the surplus of both into their 2nd "retirement" home. Now, most of them are probably just barely hanging on to their 1st home ... the 2nd is gone, along with most of the retirement account.

Also in CA, NV & AZ, and probably in FL, too, the now national-presence builders had become adept at making their bonus money off of selling "upgrades" and mortgages, which the London/German Banks were crying for from our Big Banks & Brokerages. "Don't worry! We'll just bundle the better carpet and granite counters into the price and it'll only cost you a few dozen bucks a month. And, if you finance through us, we can get you a big discount (off the inflated prices) and a great (reset able) rate!"

When things started cooling down a tiny bit because house prices couldn't go any higher and those first few who had really over-extended themselves began having problems, neither they nor the rest of the poor suckers stood a chance. The frauds committed in each sector compounded those of the others. Plus Goldman had force-fed IEDs to Bear Sterns and Lehman Bros and AIG. (IED - Improvised Exploding Debentures.)

The Big Banks & Brokerages Panic of '08 began and quickly spiraled out of control - and still does. Yet, not a single Banker nor Brokerage executive has been indicted and only a handful of the other "perps" here and there have been indicted either.

Basically, the Victims have been blamed and pilloried, while the Perpetrators have received enormous bailouts and bonuses.

Dollars and cents and real people actually matter

Michael, you often focus on really important details like this - well done.

I suggest that the COMBINATION of "bubble value component" in house prices PLUS "distance required to drive to qualify"; IS the deciding factor here.

We are talking about a kind of exponential effect here. The higher the "median multiple", not only the higher the mortgage payments for the marginal household, but the higher the transport costs AS WELL.

THIS is why the foreclosures affected the "drive to qualify" suburban developments of the most expensive States, disproportionately.

It really does come back to the high house prices. I just commented to Todd Litman on another thread, that even Anthony Downs in "Still Stuck In Traffic" (2004), did a convincing analysis of the effect of inflated house prices - he calculated that when the median house price goes above about $170,000, "transport" costs become LESS significant than "housing" costs and JUSTIFY "drive to qualify" MORE, the FURTHER away and the lower-priced the housing gets.

I keep hammering this point. If you want efficient urban form, you MUST keep your land prices DOWN by avoiding regulations that force them up. Prof Alex Anas of SUNY Buffalo is actually now advocating zoning or taxing non-developed land around cities to force its price down; the OPPOSITE of UGB's that force the price of this land UP. Prof Anas is at the pinnacle of his profession; very few understand the connection between land prices and efficiency of urban form like he does. The LOWER the prices, the MORE efficient the urban form will be.

It is tragic in its implications, that "planners" as a class seem to be the LEAST equipped to grasp this. The carnage that is resulting is an "economics lesson" differing from the "economics lesson" given to humanity by Communist "planned economies", only in its scale. And if it results in "the end of capitalism", it WILL match or exceed that lesson in the scale of its impact.

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