Ground Zero Of The Housing Collapse – CA, FL, AZ, NV

FDIC 2009 Economic Landscape

The FDIC Economic Landscape Report details how the out of control lending mania created the perfect housing storm.  The largest housing bust in US history centers in four states which had the largest housing price increases and are now suffering the consequences of a boom gone bust.

The Sand States: Anatomy of a Perfect Housing-Market Storm

The housing downturn has been most acute in four states—Arizona, California, Florida, and Nevada—that had experienced some of the highest rates of home price appreciation in the first half of the decade. While these states are not all contiguously located, their similar housing cycles and abundance of either beaches or deserts have led some analysts to label them “Sand States.”

For many years, rapid population growth in the Sand States spurred higher than average rates of home construction. Favorable weather and relatively affordable housing are two factors that attracted retirees as well as younger families to these states. In the 1980s and 1990s, population growth rates in Arizona, Florida, and Nevada were between two and four times the national rate.

During this decade, strong demand for housing, supported by a growing population and an expanding economy, contributed to growing housing market imbalances across the Sand States. Perhaps the best measure of the imbalances that accumulated in booming housing markets during this decade was the relationship between home prices and incomes. In the years leading up to the housing downturn, escalating home prices far outpaced income growth.

A combination of factors drove the housing sector imbalances in the Sand States to unprecedented levels. Under normal market conditions, strained affordability tends to limit housing demand because fewer households can purchase a home using traditional mortgage financing. However, in this cycle, new mortgage “affordability” products were commonly used to finance home purchases.

Ultimately, the housing boom in the Sand States proved to be mostly a mirage. The first signs of trouble came in the form of sharply decelerating rates of home price appreciation.

As home prices slumped, foreclosure activity rose at a startling pace. While this phenomenon was occurring across the nation, it was most pronounced in the Sand States.

Table 1

National Share of Foreclosures Started National Share of Mortgages Serviced
California 19.2% 12.9%
Florida 16.2% 7.8%
Arizona 4.4% 2.7%
Nevada 2.7% 1.2%
Sand States Total: 42.5% 24.6%
Source: Mortgage Bankers Association.

The housing market downturn in the Sand States is now having serious ripple effects on other parts of the local economy. Each of the Sand States lost jobs in 2008. The losses have been most pronounced in the construction sector, which has shed more than 450,000 jobs, or about 24 percent, between fourth quarter 2006 and fourth quarter 2008 (see Chart 1). In addition, job losses have spread to the financial services and retail trade sectors. Retail sales also have declined, particularly for home improvement, furniture, and electronics store sales, contributing to additional layoffs.

The pain of the economic dislocation caused by the housing boom gone bust will be prolonged and costly to many individuals and the Nation as a whole.  The lack of regulation by regulators may be the most under reported part of the national housing mania scandal.  Apparently, as long as housing prices were rising, no part of the vast government regulatory network chose to question why trillions of dollars in mortgage loans were being made to borrowers with little or no capacity to repay.   Bubbles and manias cannot develop without a suspension of belief in basic economic reality and common sense.  We are all now paying the price for a misguided belief that unlimited lending could create unlimited wealth.


  1. Tonia Kelso says:


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