2009 Economic Landscape
loan; negative-amortization loans that offered initial
payments well below the amount required to cover
interest and amortize principal; and balloon payment
loans, which typically required a large lump-sum
payment at the end of the loan. Unlike subprime mort-
gage products that were designed for home buyers with
limited or weaker credit histories, these nontraditional
mortgages were marketed broadly and often used by
first-time home buyers and investors who did not
provide a down payment. In addition, originators of
these products frequently did not require buyers to verify
that their income could support the mortgage payments.
By 2006, nearly half of total U.S. originations of privately
securitized affordability mortgages were made in the four
Sand States alone. Moreover, the proportion of these
mortgages originated in these states, including nontradi-
tional mortgages, rose as home prices escalated. During
2002, these products accounted for roughly half of the
privately securitized mortgage originations in each of the
Sand States, comparable to the rest of the nation. By 2006,
however, the proportion of these products had increased to
80 percent of privately securitized mortgage originations.
Nationwide, the percentage was about 70 percent.
3
The increased presence of speculators or investors in the
Sand States also contributed to growing imbalances in
the housing sector. Data from mortgage servicers indicate
that nonowner, investor, and second-home mortgage
originations increased noticeably in Arizona, Florida, and
Nevada between 2000 and 2005.
4
Investor and second-
home purchases tended to be more heavily concentrated
in major metropolitan areas in these states, such as
Las Vegas, West Palm Beach, Miami, and Phoenix.
Strong housing demand coupled with escalating home
prices served as a dual incentive for builders to increase
the supply of homes, arguably at a rate that exceeded
short-term demand. New home construction started to
accelerate in 2002, and, over the next three years,
housing starts in these four states increased an average
of 11 percent annually, or about twice the rate of
increase elsewhere in the nation. Housing construction
in the Sand States far outpaced annual growth in the
number of households, which peaked at 1.6 percent in
2004 and 2005.
3
Data are from Loan Performance. Affordability mortgage products
include ARM loans, interest-only loans, negative amortization mortgages,
balloon loans, and hybrid ARMs. Affordability originations are measured
as a percentage of privately securitized origination, first liens only.
4
In contrast, California had less investor activity during the period,
likely because the median home price in the state was relatively high,
resulting in a less attractive rate of return for potential investors.
Labor market imbalances also arose as job growth became
skewed toward the housing sector. During the height of
the boom, construction employment grew 10 percent per
year in these states, far outpacing growth in other indus-
try sectors. During this time, construction jobs accounted
for a disproportionate 25 percent share of new jobs, while
representing less than 10 percent of total employment.
Tipping Point: Imbalances Lead to Housing Collapse
Ultimately, the housing boom in the Sand States
proved to be mostly a mirage. The first signs of trouble
came in the form of sharply decelerating rates of home
price appreciation. Between 2003 and 2006, annual
home price appreciation rates in these states had consis-
tently exceeded the national average. Year-over-year
house price appreciation in Nevada peaked in 2004 at
37 percent. In Arizona and Florida, appreciation peaked
in 2005 at rates more than twice the national average.
Since then, average home prices in the four states have
declined between 27 and 38 percent from their peak.
5
Price declines have been most severe in metropolitan
markets such as Phoenix and Las Vegas, which regis-
tered the largest percentage declines in the nation at
34 percent and 33 percent, respectively, during 2008.
6
As home prices slumped, foreclosure activity rose at a
startling pace. While this phenomenon was occurring
across the nation, it was most pronounced in the Sand
States. According to the Mortgage Bankers Associa-
tion, the Sand States accounted for more than 40
percent of all mortgage foreclosures started in 2008,
which is nearly double the share of mortgages held by
borrowers in these four states (see Table 1). This
disproportionate share of troubled mortgages in the
Sand States was most acute among ARMs. In 2008,
these states held 46 percent of the prime ARMs
outstanding nationwide and 64 percent of foreclosures
started within this mortgage category.
In fourth quarter 2008, foreclosure resales accounted for
more than 55 percent of all California resale activity,
almost three times the level of a year ago. Foreclosure
resales were also prevalent in Las Vegas and Phoenix,
where this type of transaction accounted for about 71
and 65 percent, respectively, of house and condominium
resales.
7
5
Federal Housing Finance Agency, purchase-only index data through
fourth quarter 2008.
6
S&P/Case-Shiller Home Price Index, data as of December 2008.
7
Data Quick Information Systems through www.dqnews.com.
Las Vegas and Phoenix data are for February 2009.
FDIC QU A R T E R L Y 31 2009, VO L U M E 3, NO. 1