Nevada Employment and Housing Oversupply

To what extent has Arizona’s strong economy benefited from in-migration of desperate Nevadans?
March 11, 2011: Most of the District of Columbia’s employment increase isn’t government employees, but it does reflect the macroeconomic stabilising effect of the acyclical government. After the District and Texas, the list gets interesting. It’s not exactly the places you’d expect to see, and neither is there a clear geographic pattern.

The country’s west is generally in poor shape, but Washington is in the top ten. Arizona is there, while other bubble centres have done very poorly. In general, the northern Plains look strong, as do the mid-Atlantic and northeast. The south and midwest didn’t have as good a year.


Oversupply can take many forms. America’s big housing worry is its huge “shadow” inventory—homes whose owners are seriously behind with their mortgage payments or in foreclosure and which will eventually come onto the market. Even though American house prices are now back at fair value (ie, the ratio of house prices to rents is back to its long-run average), this pipeline of distressed properties is putting prices under continued pressure.

It also helps explain why America has suffered such a sharp fall in prices after the bust despite peaking lower than many other countries. House prices are generally “sticky” on the way down, in part because people are averse to selling at a loss. But America’s bust has brought waves of distressed sales, forcing prices down rapidly. Around a quarter of borrowers are now in negative equity. “The big question is not how fast prices rose but how fast and how much they fell,” says Eric Belsky of the Joint Centre for Housing Studies at Harvard University.

One explanation is that unemployment in America rose more sharply than in other rich economies, and even creditworthy borrowers cannot cope with a sustained loss of income. But the initial drop was down to causes more specific to housing. The most obvious culprit was the extraordinary laxity of America’s mortgage-underwriting standards in the later stages of the boom. With very little equity in their homes to protect them from a drop in prices, lots of high-risk borrowers quickly became submerged when the bubble burst. Housing boffins regard negative equity as the best predictor of default, which is why they take loan-to-value ratios very seriously. It is also what saddles banks with losses when homes end up in foreclosure.

A related issue is the amount of “strategic defaulting” in America: the number of people choosing to walk away from their homes. Its prevalence can be exaggerated, but it has still come as a surprise. Before the crisis the conventional wisdom had been that people would do whatever they could to stay in their houses, giving priority to mortgage payments over all other forms of debt. But Andrew Jennings of FICO, the company behind America’s FICO credit scores, reckons that 25-30% of defaults are now premeditated. He says that many borrowers, often nominally lower-risk ones, prepare for default by making more credit inquiries and taking up other loans. The practice is more widespread in the many American states where lending is “non-recourse”, meaning that lenders cannot come after a defaulting borrower for any debt left over when the property is sold.

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