The Foreclosure Five

The beneficiaries of taxpayer charity will be highly concentrated in just five states — California, Nevada, Arizona, Florida and Michigan. That is not because the subsidized homeowners are poor (Californians with $700,000 mortgages are not poor), but because they took on too much debt, often by refinancing in risky ways to “cash out” thousands more than the original loan. Nearly all subprime loans were for refinancing, not buying a home.

It turns out that the five states with by far the highest foreclosure rates have some things in common with each other, but very little in common with most other states.

I studied the latest available figures for state foreclosure rates, changes in home prices over one and five years, existing home sales, the percentage of mortgages that are underwater, and unemployment. Then I compared figures for the five most foreclosure-prone states with New York and also with the 25th-ranking (median) state.

One out of 76 homes in Nevada went into foreclosure in January, for example, compared with one out of 173 in California, with Arizona and Florida close behind. In New York, by contrast, only 1 out of 2,271 homes went into foreclosure.

Nationwide, foreclosures fell 10% in January, to one out of every 466 homes. But that is a “mean” average dominated by places like California and Florida. In the median state with the 25th highest foreclosure rate, by contrast, only one out of 949 homes was in foreclosure — just one-tenth of 1%. Foreclosure rates were even lower in 25 other states. In Vermont, foreclosures amounted to just one out of 51,906 homes. Foreclosure can be a personal crisis, but it is not a national crisis.

Now consider the change in home prices between the third quarters of 2007 and 2008, using the OFHEO price index — the only measure available by state. Like most of the new mortgage-relief plan, the OFHEO index covers mortgages that qualified for Fannie and Freddie financing. It excludes jumbo mortgages larger than $729,750 in high-cost areas like New York City.

As of the third quarter of 2008, OFHEO home prices were still higher than a year before in 18 states, and down less than 2% in a dozen others. Double-digit declines in home prices were confined to just four states — surprise, every one of the Foreclosure Five except Michigan.

Even though California home prices fell 20.8% over the year ending in the fall of 2008, however, they were still 50% higher than they were just five years ago. In Florida and Nevada too, the bust in home prices obviously followed a speculative boom. Back in April 6, 2008, a New York Times graph showed that default rates on only the riskiest subprime mortgages had already reached 21% in Merced and Stockton, California, and ranged from 19% to 24% in Fort Myers and Naples, Florida.

So what’s happening now? By looking at sales, you can see the free market is working very well. Sales of existing homes over the past year have soared in four states where home prices fell the most. Reducing the inventory of unsold homes, foreclosed or not, makes it easier to sell remaining homes and thereby works to arrest falling home prices. Falling home prices are not the problem, they’re the solution.

Obama is particularly interested in mortgages that are underwater — that is, larger than the value of the home. But again, this varies enormously by state. The state with the tenth highest percentage of underwater mortgages, Texas, has the same 16.5% underwater as the so-called national average. The other 40 states have a below-average percentage of homes that are worth less than their mortgages, which means the mean average is not at all typical of most states.

A similar report from First American Core Logic reports that only 4.4% of New York mortgages are underwater, not even a tenth as many as in Nevada.

Looking at the Foreclosure Five, you find another consistency — unemployment rates far above the national average (half the states were below 5.9% in December).

The exception is Arizona, where unemployment is a more reasonable 6.9%. Stephen Miller of the University of Nevada and Rangan Gupta of the University of Pretoria explained the apparent anomaly by explaining that migration and the market for second homes make Phoenix housing dependent on economic conditions in Los Angeles and Las Vegas. Miller and Gupta found that “Los Angeles housing prices cause housing prices in Las Vegas (directly) and Phoenix (indirectly). In addition, Las Vegas housing prices cause housing prices in Phoenix” to rise or fall in step.

Boosting the Obama team’s selective mortgage subsidies, Mark Zandi of Moody’s Econ​o​my​.com recently told NBC, “either you can help your neighbor, and help them so they can stay in their home. Or don’t help them, and they’ll lose their home, and it will cost you money, because … your home will have just dropped in value.” On the contrary, federal subsidies for over-indebted homeowners will not often involve helping “neighbors” but rather those who live thousands of miles away, mainly in just five states.

In reality, the “Homeowner Affordability and Stability Plan” compels taxpayers in most states to help those in just a few. Aside from Michigan’s unique dependence on autos, the other four states’ problems are already being solved the old-fashioned way: If something becomes too expensive, cut the price. Or move.