An article about Todd Zywicki’s forthcoming book in Forbes provides a little philosophical/theoretical underpinning for the point that I’ve been making here for some time, namely that there is no nationwide mortgage meltdown but a local problem with national implications. In the article Mr. Zywicki is said to distinguish among three distinct sorts of housing markets.
In the first, exemplified by Dallas and Charlotte, the market responds to changes in demand with “smooth adjustments”, increasing the number built when demand is high, reducing the number built as demand falls. In the second, exemplified by older markets like New York, Boston, San Francisco, and Washington, DC, price volatility is a way of life:
“The housing stock in these markets is constrained,” Zywicki says, “either by geography–San Francisco is surrounded on three sides by water, for example–or land use controls.” When demand in such a market increases, prices soar. And when demand weakens, prices plummet.
“But the people who live in these markets expect big price swings,” Zywicki says. “They’ve learned to live with them. They’re holding onto their homes because they’re confident prices will eventually recover. Again, there hasn’t been any tragedy.”
The third variety combines the ability to expand supply of the first sort with the price swings of the second:
The third type of market displays both the ability to expand the supply of houses that characterizes the first type of market and the price swings that characterize the second type. “Type three markets,” Zywicki says, “are concentrated in the Sun Belt. Ordinary investors seem to have calculated that a lot of people would either retire or buy second homes in these places. And when prices went up, speculators moved in. Pure bubbles developed.”
In type three markets, hundreds of thousands of new homes went up. This oversupply will now keep prices low for years. “Las Vegas, Phoenix, Tampa–those are the places you’ll find the tragedies,” Zywicki says.
Where there’s a genuine problem—in the type 3 markets—we need to have solutions tailored to the situations in those markets. Acting as though one size fit all will only exacerbate the problem. Imagine if, in the aftermath of Hurricane Katrina, rather than concentrating aid in the areas that had been struck by the hurricane, the decision had been made to distribute the aid evenly through all fifty states for fairness sake. The places where the hurricane had struck would not have received nearly enough aid to help them and the other states would have received an unnecessary windfall.
As I see it that’s the approach we’re using towards the mortgage foreclosure crisis.
