Illustrating the Housing Bubble

There’s a fantastic graphic in this article at the New York Times that illustrates the point I’ve been making here, that there is no national mortgage crisis but, rather, local mortgage crises with national implications, for some time just about as well as can be imagined. The picture above is just a capture of it illustrating the Chicago market. The original is a Flash graphic so it’s not straightforward (or legal) for me to copy it here so go over and take a look at it for yourself.

The graph shows the ratio of median home price to median income for the 20 markets that make up the Case-Shiller index of housing prices from 1979 to 2009. The graph shows very sharp peaks in a handful of markets (San Francisco, Los Angeles, New York, Miami, San Diego, Boston, Las Vegas) with smaller peaks or none at all for the remainder of the cities.

In general the markets that have seen the largest number of foreclosures are those, e.g. San Francisco, Los Angeles, Miami, where prices have fallen the farthest from their peaks. Although there’s been a spike in foreclosures in many other markets, it’s nowhere near a crisis in most of the markets, e.g. New York and Boston, where prices haven’t fallen nearly so far.

When you descend from the Olympian heights, AKA the view of the mortgage crisis in Washington, DC, and examine individual markets in more detail a sort of fractal view emerges: the sharp peak is most seen in specific neighborhoods with other neighborhoods having dramatically smaller rises and declines and commensurately smaller foreclosure rates.

There are a number of conclusions that can be drawn from the data:

1. Prices grew completely out of reasonable bounds in certain, specific markets many of them in California. Those markets have a long way to fall before housing prices resume their historic relationship to incomes.
2. Something dramatic happened, especially in the worst affected markets to housing prices, first in the mid-1990’s and then in the late 1990’s or early 2000’s. I’ve presented several possible explanations but I’m open to suggestions as to what those were. I think the one in the mid-1990’s was the pegging of the yuan to the dollar.
3. Most markets didn’t experience the enormous spike and aren’t experiencing the dramatic fall, either.
4. There’s also some evidence for another point I’ve made here before that markets, e.g. Boston, that are accustomed to cyclic rises and falls in housing prices and have institutional accommodations to match are in better shape.
5. One size doesn’t fit all, at least not in terms of dealing with whatever mortgage crisis there is.

Detroit is a special case. It’s like a company town after the company that’s employed most of the people who live there closes its doors. It’s becoming a ghost town, a mere shell of its former self. The same thing happened to Pittsburgh when Big Steel downsized. That’s hard on the people who live there and call it home but I don’t see any real alternative. And certainly it can’t be treated like the boom towns in California.

David Leonhardt, the author of the article, looks at the historic data and thinks there’s another few points to fall before the buttom of the trough is reached:

There are reasons, though, to think that prices may be on the verge of stabilizing. Relative to fundamentals, like household incomes and rents, houses nationwide now appear to be overvalued by only about 5 percent. You can make an argument that the end of the housing crash is near.

Why isn’t that what he saw at the foreclosure auctions?

How could that be? Because Fannie Mae, like many banks, is inundated with foreclosed properties. In recent weeks, banks have begun accelerating foreclosures again, after having held off while waiting to find out which homeowners would be eligible for the Obama administration’s assistance program.

The glut of foreclosed homes creates a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of homes for sale. The excess supply then leads to further price declines. Jan Hatzius, the chief economist at Goldman Sachs, says that the “massive amount of excess supply” means that home prices nationwide will probably fall an additional 15 percent.

But that’s looking at things from the Olympian heights again. The reality is that for some markets and some neighborhoods in those markets, housing prices still probably have a long way to fall. How that affects the remainder of markets which have already returned to historic norms may depend on how the federal government continues to manage or mismanage what’s going on.