New York Fed: Housing Boom/Bust was Regional

A new report by the New York Federal Reserve (Bypassing the Bust: The Stability of Upstate New York’s Housing Markets during the Recession) has drawn some interesting conclusions, namely that the housing boom and subsequent bust have been marked by wide regional disparities, and that there was/is a strong correlation between subprime lending activity and the degree of boom/bust.

The first claim is not wholly surprising. It has already been established that the areas characterized by the wildest booms also saw the most violent busts: California, Florida, Arizona, and Nevada. You can see from one of the report’s excellent pictorial graphs that New Jersey, Massachusetts, Connecticut, and New Jersey also fall into this category. On the other hand, most of the non-coastal US experienced neither boom nor bust, while the Pacific Northwest, and much of the east coast (excluding the aforementioned states) boomed and didn’t bust. Michigan, Ohio, as well as parts of Indiana and Illinois inhabit the worst of both worlds, having experienced the bust without the boom.

There are a few prima facie conclusions that can be quickly drawn from this. First, the majority of big boom / big bust regions are in tropical/arid areas, and are commonly associated with retired people. The two main exceptions to this rule were Honolulu and Virginia Beach. In addition, most of the country’s largest and most populous cities experienced at least at least a mild boom and bust. On the other hand, areas where land is inexpensive and wildly available (as in much of non-coastal experience) have experienced neither boom nor bust, since increased demand can be easily be met with affordable, increased supply. This is also true of the handful of states that experienced bust without boom, as housing supply has been consistently plentiful, but demand has been hit by the economic recession. The absence of major recession in some ares, meanwhile, perhaps explains why they have continued to boom in spite of what’s been happening in the rest of the country.

These conclusions are largely intuitive, and without the report’s careful analysis, that’s all that we would have. Fortunately, the authors didn’t stop here. Their next step was to map the “penetration” of non-prime loans, along with the corresponding rates of delinquency and foreclosure. Unsurprisingly, delinquency and foreclosure appear to be somewhat correlated with the penetration of non-prime lending. However, this correlation is weaker than one would expect, due to the superseding effect of economic recession.

What is more interesting, is the very strong correlation (64%) between non-prime loan penetration and boom & bust. In other words, the regions where housing prices rose quickly and fell steeply were the very same regions that experimented with unconventional types of mortgages and were most able to provide financing for all borrowers. “Metropolitan areas with a higher penetration of these loans by 2006—when activity peaked—experienced faster home price appreciation, but also saw a relatively rapid decline in values once the reversal began. Accordingly, a larger number of the nonprime loans that originated in these areas have entered delinquency or foreclosure.” Still the authors point out that these two trends were self-reinforcing: non-prime lending activity fueled housing price appreciation, which in turn fueled more non-prime loans.

From a practical standpoint, there are two take-aways from this report. The first is that there is no free lunch: if housing prices are rising due to speculation (rather than economic fundamentals and demographic drivers), there is a high probability that a correction will follow. Second, if ever it is too easy to obtain a mortgage (in a particular region), again, there is a high likelihood of boom & bust.