It's a bit unfair to pin a national recession on two states, but consider the map, which shows foreclosure density by county.
Florida and Southern California clearly helped get the foreclosure ball rolling. As BusinessWeek presciently noted two years ago, Florida's glut of residential housing made it one of the first states (along
with, of course, California) to slip into the recession that now
grips the country. For a long time, Floridians used their houses as
ATMs. It's likely that when their house value imploded, they suddenly
found themselves underwater with both the mortgage and credit card
companies. Indeed, Forbes found that the average Orlando earner owed 23% of
their income
to the credit card companies, which is incredibly like saying the
credit card companies are owed the equivalent of a Floridian's summer income. Gulp.
Great stuff!
One factor (this is a WAG) is that both states had a lot of foreign investors. Foreign investors often lack local market knowledge so they can easily make investment mistakes. It is also easier for a foreign investor to walk (fly?) away from their investment mistakes.
Once the real estate bubble popped, the local economies went to crap. Credit card abuse is more likely in a bad economy than a good economy (another WAG).
The credit card debt link for Forbes is wrong. Here's the article:
http://www.forbes.com/2009/05/20/american-consumers-overspending-lifestyle-real-estate-credit-card-debt.html
I bet if you overlaid a map of the counties with the largest housing price increases 2000-2006 or largest price decreases 2006-2009, that map would look almost exactly the same.
Assuming that's true, then the question becomes: what drove these giant housing price swings?
And do notice that it isn't just FL and CA - NV and AZ are pretty huge as well.
I think your assumption with the counties holds true except some of the counties that are more "desirable" started to drop late.
As for the driver of the price swings? My money is on speculation fueled by a healthy supply of free money.
During the savings and loan crisis, I concluded that "supply and demand" in the real estate sector is supply and demand for credit, not real estate. A few years ago, I met a guy who was in the moving business -- he had one truck and two teenagers working for him -- in Santa Rosa (northern California). He talked about his $500,000 house This is the upshot of easy mortgage credit. What happened to him when his ARM adjusted? The median house price is down by a third.
I'd like to see an overlay of the Red/Blue - Republican/Democrat county-by-county voter results. To me, the interesting phenomenon is how the mortgage default rates mirror the liberal voting results. I know this will be misconstrued by many (and I'm not going to lose any sleep over their knee-jerk reaction), but I would also like to see a little 'reverse-redlining'. It would be interesting to see this same map broken into white, Hispanic, and African-American demographics. It might give a better perspective to what the true dynamics are that underlie the simplistic hew-and-cry of 'red-lining'.
Well, if you actually compare the foreclosure numbers here:
http://www.dqnews.com/Articles/2009/News/California/CA-Foreclosures/RRFor090422.aspx
with the voting results here:
http://www.sos.ca.gov/elections/sov/2008_general/ssov/6-pres-by-congress.pdf
it's pretty obvious that there's no strong correlation between liberalism and foreclosures, at least not in California. Conservative Orange County has a much higher foreclosure rate than ultra-liberal San Francisco. The highest raw number of foreclosures is Los Angeles, where the 2008 election was actually very close. Does this suggest moderates more likely to be foreclosed on?
As a former resident of Florida, I can tell you what the problem is. A low wage paying state with loads of "Joneses Wannabees" who used credit cards, home equity lines and "exotic mortgages" to attain that fake lifestyle. When determining friendships, most are based on answering the first question of, "Where do you live?" and if the subdivision is DIVIDED into different price levels, then question number two, "Which part of the subdivison do you live in?"
I was happy to leave and move away if anything for the sake of my kids. Especially when I was asked during the boom years by a first grade friend of my daughter's, why I don't drive a Mercedes?
Teenagers were seen during the boom years driving luxury cars to school and MTV features many a South Floridian for its "Super Sixteen Party" series, showing parents spending 50K or more for a birthday party and giving their kids BMW's in their favorite color!
Spoke to a friend of mine who still lives there this week, and she said many of those McMansion, credit card home equity line owners are laying low. Hiding from questions of why the BMW is gone, why no more furniture deliveries, $150 dinners out, no vacations,the liens now placed by the HOA, or worse foreclosure and why their kids no longer walk around with Coach Bags?
Florida is learning a valuable le$$on.
Thanks Anna,
I too was happy to leave. $31,000 job and the only houses for sale over $130,000, and up.
The only decent jobs are Lawyers and Doctors. How is a set designer at Disney World supposed to afford a house in Orlando. By living off the Home Equity Loans until the crash.
The Skeleton Hotel stood in Fort Meade Florida for 50 years, a frame of girders 10 stories high. It took from the Crash in 1921 until 1971 for the price of steel to make it profitable to recycle the beams.
History repeats.
Come on. You think social status and material lifestyles are unique to Florida? There are three main drivers for the complete collapse in these states...
1) Out of state investment into real estate is significant. Investors were buying 5-10 homes at a time in new communities with the intent of flipping them. As the market softened, the houses laid empty, housing supply grew quickly, and foreclosures spiked
2) Their status as retirement states. much of the condo market and resale market was driven by retiring baby boomers. With the collapse of 401k and retiement savings that has completelty vanished
3) Winter/Vacation Homes. The recession has dried up the winter/vacation home market.. which has hammered not only the buying of these properties but also the rental market. Vacation homes are sitting empty and ultimately foreclosing.
convict:
The problem with your analysis - speaking as a resident of Florida, and addressing Floridian issues primarily - is this:
1) Out of state investment drove the pricing, but it also provided anyone not a JD or an MD with means to live in the state. It also seriously penalised anyone who tried to keep a piece of property over time: even homesteaded tracts quickly became unaffordable as valuations rose and insurance rates skyrocketed with each weather event. The housing speculation had no impact on the rising utility rates, and only impacted the skyrocketing insurance premiums in that they created new valuable structures in high-risk locations (e.g. the impact should have been on the new structures not the existing ones, yet was distributed instead).
2) The retirement state status also feeds the low levels of compensation. With a substantial proportion of the state population retired and living on fixed incomes, the ability to pay for increasingly high-skilled labor to maintain the modern community shrinks substantially. Thus at the same time one has demand for high-tech services without the ability to afford the talent, and the use of real property to back the expenditures.
3) The vacation home segment of the market has been dormant since 2006 at the latest: the buyers in that segment have proven unwilling to accept the pricing of the last wave of offerings. Add that to the substantial tax and insurance burden and Florida priced itself out of the market well before the height of the crash. The foreclosures coming now are hitting construction labor and service sector employees, who are losing their jobs in the desiccated employment environment post-crisis Florida is now experiencing.
The chief issue with Florida is that compensation has never kept up with the costs of living in the state, yet at the same time the state expected that their needs could always be met with local talent - talent more often than not lured elsewhere by lower costs of living and better compensation. Decades of employer parsimony coupled with suddenly skyrocketing real estate values encouraged the property profiteering of the late nineties and early noughties not as a means of getting rich but merely as a means of getting by. Now that the real estate market is gone the salaries that remain are insufficient to pay the obligations, and as the ARMs sold in the last decade adjust upward the number of affected borrowers only increases. Private enterprise can't cover the tax and insurance obligations and afford liveable wages, the public sector can't provide the same without raising taxes, and the local market / tax-base is comprised largely of fixed-income households that couldn't afford either the higher tax/insurance rates or fees for services/commodities. Critical mass has been reached.
I can't speak for California's latest trend, but I recall the unintended consequences of Prop 13: hyperinflated property values, skyrocketing rents, etc. In California's case, though, the state has (had?) a more healthy economy than Florida, which could afford those fees better.
I also agree with Anna - to a point. The "Joneses wannabes" she mentions do certainly exist, but there are a lot of folks who were hit by the downturn who simply tried to survive. Consider that replacing a home bought decades ago for pennies to save property taxes and insurance costs would involve substantial capital gains taxes, and that the owner would be facing the same elevated market as the speculators. Relocating would encourage that homeowner to spend the maximum allowed under the tax code on the replacement residence, which would in turn affect the tax valuation and insurance premiums assessed. The replacement structure would often be more grand than the house it replaced simply because of the construction style, requirements of newer building codes and the need to shelter the value of the property sold in order to obtain it. In the day this wasn't "keeping up with the Joneses" - it was sound investing to minimize obligations.
This is a very interesting analysis... and some great comments. Here is what comes to mind after reading it/them:
1) no legend key for the red lines or dots -- what specifically do they denote?
2) "It is a bit unfair to pin a national recession on two states...." From what I have read, the economic situations in states like Michigan and Ohio are quite dire; I don't know how much they cause or contribute to the national recession, but they are apparently feeling it as much or more than anyone else, so without additional data, I agree it's unfair to pin the r. on CA/FL.
3) One of the commenters pointed out that NV and AZ appear to be not far behind. I wonder if foreclosure density in NV, not just Clark County (Las Vegas), is equal to that of CA, since Vegas composes so much of the state's population.
4) You correctly point out that 8 of 10 highest credit card debt cities in USA are in CA or FL (4 apiece). One thing I notice is that in FL, these 4 cities are distributed statewide -- in fact I believe they are the 4 biggest cities in the state (Miami, Tampa, Jacksonville, Orlando). In CA, there is a geographic divide: its 4 cities are in So Cal (3) and Central Valley (1), but not one in even the top 20 is in the Bay Area. I wish I could see the California foreclosure geographic distribution better, so i could compare counties in that state.
Experience=3 up & 3 down markets.
Frugal IRR investor. California real estate cycles average 8-12 years up & down. 2006 was the top, so the bottom will be about 2014-2018. It's that simple & any other FEELINGS is null and void. Owners, if you didn't sell or bought (2002 to 2007) you lost out! Walk away and then buy in 7 years when your credit clears up. Professional IRR Bottom feeders like me buy when 90% are sellers, like 1995-1999. We then sell at the "HIGH" like 03-07. Sellers with 100s of deals push the PANIC SELL BUTTON! I sold 198 properties at the bubble top! Avg. profit 1165% or 11.65 to $1. About 48% per month avg. gross profit. Stick this in your passport so you never forget! Let's try to get to 100 countries visited till the bottom, 2014-2018.
I think United States is observing one of the biggest downturns in the housing market in this recession period. Aggressive efforts are being taken by the government to bail out the homeowners from this situation. But the success of these efforts is still on the grim side. The recession hit in the housing market is still very high as the unemployment rates are reaching its peak day by day.
http://www.housingnewslive.com/is-the-housing-market-recovering.php
Since the home owners are not able to cope up with the repayment due to their loss of income in spite of the federal efforts taken to alter the terms of repayment, the recovery of the housing market is still very bleak. Anxious homeowners opt for foreclosures and lenders are pricing aggressively to increase the possibility of sales of these homes.