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The obvious question raised by the last post is if the foreclosure crisis really is centered in Florida, Arizona, Nevada, and California, then why is it centered there? Herlitz and Lucy have some theories, and because I'm a Californian, I'll quote the California angle:
The huge run-up in housing prices in California created opportunities for large gains for home buyers if price increases continued. Thus, more households may have been attracted to potential gains, worried, perhaps, that they would be priced out of the home buying market if they did not act quickly. Some lenders (Countrywide) specializing in subprime, no principal, interest only, and no income check loans got their start in California and focused there. Perhaps the expansion of prime home-buying age groups up to 2004 was followed by a decline in these groups in California, on par with or greater than the national demographic transition. Perhaps public policies had some effects, such as hindering infill construction and transit-oriented development in the City of San Francisco and other attractive cities and inner suburbs. And perhaps Proposition 13 was influential. Because Proposition 13 limited property tax increases to one and one-half percent per year, home buyers could buy with a low interest ARM, perhaps interest only, for two or more years, pay little more in property taxes in the second and third years as their property value increased, and sell at a substantial profit in two or three years before the reset ARM higher interest rate became too burdensome—an attractive opportunity for some young buyers anticipating moving.That's a bankshot scheme the authors outline. And not one you heard much about. But it is the sort of thing that could have happened organically. Herlitz and Lucy are basically saying that California's property tax limits made house flipping more profitable, thus more attractive, than it was in other states. You wouldn't need a detailed understanding of the property tax law to notice that your house flipper friend had just bought a boat.
