Falling Housing Prices and Failing Banks

Many pundits think that national housing prices haven't hit bottom yet. Estimates range from a further drop of 5% to a further drop of 30% in 2011, at which point they will have hit bottom.

I'm really not all that interesteed in national housing price numbers because housing prices are the quintessentially locally determined economic indicator. National housing price trends are simply a noise filled prediction about the trend in the largest individual housing markets. But, it tells you little about tends in markets the mostly move at the metropolitian area and neighborhood level, and to a lesser extent at a state or few adjacent state region level.

Places that have experienced housing bubbles without corresponding housing price collapses are most at risk. This makes me quite nervous about housing markets in places like the Northwest, and a little nervous about housing prices in parts of California and the Northeast where the bust may not yet have fully run its course, but not very concerned about places like Florida or Michigan, where the declines seem to have run their course already, or places Denver and the American heartland, where there wasn't much of a housing bubble in the first place.

The case for all housing bubble collapses being local is supported from the bank failure rates by state during the financial crisis. Commercial banks rely on mortgages for their core lending income and commercial banks that are in trouble are disproportionately in states like California, Oregon, Washington, Florida, Arizona and Nevada that experienced housing bubbles. Georgia is an outlier by this measure, probably because many Georgia banks were exposed to risks in Florida real estate. (Colorado's bank failure rate has been roughly equal to the national average, but its share of troubled banks is 10th in the nation, below the markets with major housing price collapses but worse than most of the nation.)

Also, while bank failures are useful in assessing regional trends, I should once again praise the FDIC for limiting harm in this sector. While bank failures have shown a strong regional trend, the total numbers have been small everywhere. Just 4% of the nation's commercial banks have failed since the financial crisis (2008-2010), and their share of banking assets has been much, much smaller. Only six states (CA, FL, GA, NV, OR, WA) have seen more than 10% of their banks fail in this time period (again the percentage of banking assets has been smaller), and none have seen more than 15% of their banks (with a much small percentage of banking assets) fail. Prior to the creation of the FDIC, deep recessions routine caused half of all banks to fail, and more in the places that were hardest hit.

By comparison, none of the major investment banks in the United States, which are not FDIC insured, and almost none of the major mortgage finance companies in the United States, which similarly were not subject to FDIC-like regulation, survived the financial crisis as independent companies. Almost all either failed, or were acquired by more staid or foreign financial institutions, or reorganized as commercial banks regulated by the FDIC.