The single villain theory has great emotional appeal. It explains complex situations in a simple easy to understand way. One can avoid headaches by not thinking about extraneous complexities which seek only to obfuscate (such as caused by working on "The Worst Since the Great Depression--Part 2", a work still in progress). The scapegoat, which made its first appearance in the Book of Leviticus, can be banned to the wilderness to help the larger community atone for its collective sinfulness. While the scapegoat is not quite the same thing as the single villain, it can perform the same exorcising function. By sending either out to the wilderness the citizenry has cleansed itself from the cause of its problems. Although the scapegoat has higher moral characteristics than the single villain, being representative of the community's sins, the elimination of the single villain will still fix the problem. We tend to prefer single villains over scapegoats these days, since so many of us are without guilt or sin.
Which brings me to California. Whether it should be our scapegoat or our single villain I will leave for moral scholars to discern. But as far as the Mortgage Crisis is concerned, we have met the enemy and it is in California. It is fascinating to peruse through the OFHEO website (Office of Federal Home Enterprise Oversight). The analysis of the nation's home values by region is an amazing read Latest HPI Report (PDF). The next monthly report should be out this week. The OFHEO will technically no longer exist after 2008, being "replaced" by the Federal Housing Finance Authority beginning in 2009.
It is 87 pages and also has many links. Let me try to summarize some of the more interesting facts about housing values in the United States. The broader of the 2 indexes incorporates housing which has been purchased or refinanced. This makes it much larger than the Case-Shiller index which only counts purchases. It also "equally weights" all homes regardless of value, while Case-Shiller "market weights" its homes. One is not better than the other, they just provide different information.
The smaller of the 2 OFHEO indexes tracks only homes which have been purchased. The broader index is 7 times larger than the smaller one so all numbers in this article will reference that index. However, the "all purchase" index (which is about 14% of the entire index) accounted for 40% of the decline of the overall index.This data only includes single family conforming mortgages as the OFHEO is the oversight arm of Fannie Mae and Freddie Mac. More recent data includes jumbo loans as the 2 GSE's were given temporary permission to purchase loans up to $700,000 in size. The inclusion of "jumbos" had little impact on the data.
The OFHEO divides the country into 9 regions, which are identical to the nation's census regions. The country has 5 vertical "slices"; the Atlantic Coast, the Pacific Coast, the Mountain States, the West Central Region and the East Central Region. The Pacific and Mountain regions are 2 of the 9 regions in the nation. The Atlantic region is divided into 3 parts and the 2 central regions are each divided into 2 parts.
The Pacific Region constitutes 16.2% of the nations population. California is 12.2% of the nation's population. 30 states in the nation have not experienced any year over year decline in housing values. No state in the country has home prices lower than prices were 5 years ago. There are 21 states with declines in home values counting DC over the past 12 months. The 45th worst housing market by 1 year decline in value is Maryland, with a minus 4.0%. California, the largest state in the union and ranked 51st in this index, has had its conforming housing stock index decline 15.8% in the past year.
The 6 worst performing cities in the United States are all in California. They are Merced, Stockton, Modesto, Salinas, Vallejo-Fairfield, and Riverside-San Bernadino. Why am I not surprised these are all, with the exception of Riverside, outside of San Francisco, home of some of the most restrictive and absurd zoning laws in America? Cross Country - WSJ.com - 5:50pm These 6 cities are down between 23%-35% in 12 months. Talk about Suspect Zero (2004).
The other 2 states with declines of more than 10% are Florida (-12.41%) and Nevada (-14.12%). Not quite Sunshine Supermen either. The second worst performer of the 9 regions is the South Atlantic region, which includes Florida. It is down 2.95%. The Pacific region, driven by California, is down 10.10%. It is not unreasonable to think that California's housing market, particularly Northern California, had been driven up to extremes by incentives not found as pervasively in other areas of the country.
California's impact on national housing values is likely even worse than it appears when we account for market value. Here is why. As mentioned above, the OFHEO index is an "equal weighted" index.The average and median price of a California house is about 50% higher than the average and median price for the rest of the nation. If one assumes the distribution of housing values within each of the 9 regions is approximately equal to each other; and the proportion of Californians' owning single family homes is equal to the rest of the nation, then the negative impact California housing values has on overall United States housing is 50% higher than measured by the OFHEO index.
As it is, California's impact on total US housing values is negative 1.9%, or more than the rest of the country combined. Were we to factor in total market value, California's percentage of the US housing collapse is clearly much higher. Further, absolute values and their subsequent declines in the San Francisco Bay area are the highest in California. Pursuing this line of reasoning makes me feel as if I am approaching a Gravitational singularity . San Francisco's values themselves have held up due to its Draconian land usage laws . Counter-intuitively perhaps, this makes San Francisco the Black Hole of the California Mortgage/Housing Market, if not the US housing market. Everything which surrounds San Francisco is collapsing in value from extremely high levels.
Why are the California housing markets, and Northern California in particular, not more commonly discussed by the media, politicians and Government officials? Perhaps they are unaware. Or we don't want to point fingers at the worst offenders. Or it is not polite. It certainly could not be because Senators Feinstein (ex-Mayor of San Francisco) and Boxer are from San Francisco and Oakland , respectively, could it? Anyone know where Speaker of the House Pelosi is from? Guess. San Francisco Mayor Gavin Newsome is a Media Fav and quite a leftist himself. Surely this bubble has nothing to do with zoning laws, state lending rules, self dealing, or some other factor or set of factors which has made Northern California a speculative paradise, turned nightmare. I started this commentary tongue in cheek---now I wonder if I sensed something all along. Admittedly, the rest of California is no dream either.12 of the top 20 worst US cities are in California. The Governor probably is not all that anxious to make too much noise himself. But there is just a bit too much SF in Congressional power for me to see it all as coincidence.
No other region approaches the Pacific region, even as Florida itself has been down 12% this past year. Maybe it is true that Americans just got caught up in chasing the sun. But the Carolinas, Hawaii, and Texas have not had these sized problems. Nor have the beach community states in the Northeast.
Maybe we do need to investigate this and a villain or scapegoat will be found to exist after all. Don't be surprised if he/she is named San Francisco.