Why Are Foreclosure Rates Much Higher in California, Arizona, Nevada and Florida?

U.S. Residential Foreclosures – Massive Dichotomy, Implications

On January 15, 2009, RealtyTrac reported that the number of U.S. residential housing units in foreclosure in 2008 increased 81% from 2007 and the overall foreclosure rate was1.84%.

A different view not readily apparent in the report but available through interpolation of the data is that Arizona, California, Florida & Nevada account for 20% of the Nation’s housing units and 47% of foreclosures. The overall foreclosure rate in these states (4.35%) is 3.6 times higher than the rest of the nation (1.21%). These four States had only a slightly higher foreclosure rate in 2006 (0.91%) than the rest of the country (0.80%). The 0.82% national foreclosure rate in 2006 was better than an historical “normal time” average of around 1.0% give or take10 basis points.

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The highest foreclosure rate in “All Other States” was 2.4% and above 2% in three other states.

The degree of geographic foreclosure concentration, while not well known, will influence, possibly to a large degree, the form and substance of expected federal programs to address the problem.

The data begs the question: Why is the problem so much worse in four states and what are the implications for dimensioning losses and valuations for existing mortgage securitizations? Concentrations of sub-prime lending is the leading culprit but there does not appear to be any publicly available information on whether or not individual securitized mortgage pools have been analyzed based on degree and location of geographic concentrations.

Comments

[NielsG:]

Obvious. Those states are the warmest to live in. People WANT to live there. And the rise in prices there was fueled as much by desire to be in a place as any other. People wagered their futures to live there.

The problem is, just because a place is NICE to live in, doesn't mean there will be jobs enough or high enough pay to support a given population.

Housing is very, very tightly related to the job market. And where the job market is hot, so were the housing prices. This was a case of wishful thinking that the jobs would follow the housing. And we know it doesn't. Job creation is a factor of resource costs, availability of customers, cost of doing business.

And who in their right mind would want to build a business in a place where employees have a very high expectation of high salaries, where the property taxes are high, in the face of global competition with India and China?

N

Jan 28 01:03 PM

[driftwood2:]

It's because these were the bubbliest states.

Jan 28 01:19 PM

[Trane250:]

This is a consequence of what I call "the great California real estate game" where everybody gets rich by selling each other real estate at grossly inflated prices with no money down using "other peoples' money." When a small bungalo on a postage stamp lot in Orange County sells for a million bucks, most rational people would think something was wrong. This scheme infected neighboring states as well.

Wall street financial engineers (with the help of crooked appraisers) aided and abetted this scheme by creating "AAA" rated investment paper composed of diced up mortgages, most of them junk. Then they created all kinds of derivatives based on these "CDO's." Greedy companies like AIG bought these derivates and were suffered the consequences.

Jan 28 01:22 PM

[John Preston:]

Niels

Very god observation....its not as sexy as the "subprime-liars loans"..."greedy participants"..."stupi... homeonwers"..perspectives...but it is more accurate....

You wrote: "Housing is very, very tightly related to the job market. And where the job market is hot, so were the housing prices. This was a case of wishful thinking that the jobs would follow the housing. And we know it doesn't. Job creation is a factor of resource costs, availability of customers, cost of doing business.



On Jan 28 01:03 PM NielsG wrote:

> Obvious. Those states are the warmest to live in. People WANT to
> live there. And the rise in prices there was fueled as much by desire
> to be in a place as any other. People wagered their futures to live
> there.
>
> The problem is, just because a place is NICE to live in, doesn't
> mean there will be jobs enough or high enough pay to support a given
> population.
>
> Housing is very, very tightly related to the job market. And where
> the job market is hot, so were the housing prices. This was a case
> of wishful thinking that the jobs would follow the housing. And we
> know it doesn't. Job creation is a factor of resource costs, availability
> of customers, cost of doing business.
>
> And who in their right mind would want to build a business in a place
> where employees have a very high expectation of high salaries, where
> the property taxes are high, in the face of global competition with
> India and China?
>
> N

Jan 29 08:17 AM

[Guero:]

All the comments here are mostly correct, but Trane250 is just about dead-on. Real estate was more of a game in these states. Did anyone really believe that a skanky 50 year old 1100 sq ft ranch in SoCal was REALLY worth $500 per square foot? Only a fool or a liar would say yes.

The crazy year-over-year rise in "values" had no basis in fact in these places and as a result these are the hardest hit locales. Unfortunately, their little game of hide-the-sausage Home Edition is getting everyone bloody, regardless of location.

Jan 29 10:13 AM

[sunnsea:]

Prices in Orange County CA are still too high. Instead of a million dollar bungalows they are now $500K. But family incomes are only $65K and falling. Top price should only be $180K and rents are being to fall now as well.

Jan 29 10:38 AM

[bobbobwhite:]

In 1976 when CA Bay Area real estate prices started booming, I saw that my 30 year old 850sf house was "valued" about 5 times replacement cost, even at that time, including the lot. I bought it for a bit less than 25k in 1971 and it was "worth" $70k in 1976? No way. Inflation was just starting and had been low for decades. Remember, 850sf at $50sf was a fortune then for an old shell and roof, outdated appliances, plumbing, and everything else mostly old and worn out. So, what was that old shack really worth along with the little 50X100 lot with mostly no improvements or landscaping other than weeds? And, I sold it then for only $5k less than a similar house up the street that had been recently remodeled throughout. At least $25k had been put into the other house but the sellers only got $5k more for it than I did for my shack. How could that be?

It's supply and demand, nothing more. Specific things like climate contribute, but boiled down to its essence, it's what is cyclically hot at the time. You can ask more for horse manure than for diamonds if manure is what people want more at that specific time.

Jan 29 11:23 AM

[notsosmart:]

once this started nobody could have stopped it.not even greenspan.in this country once the herd begins to move there's no stopping it.of course all is well as values rise.i took no heloc,paid my 30 yr mort. in 20 yrs.paid cash for my 18 yr old chevy.dont have a granite counter & pay my credit cards off each month.so many have learned that your house(or x house) is not an atm machine but the roof over your head.not an investment but a liability.all the wealth lost should never have existed in the first place.

Jan 29 11:23 AM

[bobbobwhite:]

Owner-occupied houses should have never been considered by business to be part of personal wealth that is available as credit collateral. That's what really screwed up the economy over time, as homes were thrown into the "personal wealth" category with other property considered "investment real estate". From there, the money lenders took over and ran with it, to our national disgrace.

People should never play money or credit games with the roof over their heads. All the people who post here not in financial trouble have the same concept and practice of how to control debt and spending. Duh.

Jan 29 01:49 PM

[dfloydr:]

Those four states are where the merchant builders were producing the most new homes. When the speculators showed up to buy two, four or ten homes, they could do so all in one place in one day while submitting a single set of (fraudulent) documents to the on site lender, and be sure to have nice new product to hopefully flip or rent out.

For a year or more the developers were raising prices on all models in a given project at the rate of $10,000/house/month. The speculator only had to wait a couple of months until the developer had moved his new price range up several notches, and then he could flip his homes for a profit.

Jan 30 10:14 PM