The Housing Chronicles Blog: Predicting a schitzophrenic recession

Monday, February 11, 2008

Predicting a schitzophrenic recession

Although most of the country participated in the recent economic boom, as the pain hits it won't be felt by all areas evenly. While some areas such as Montana are still booming, in Southern California the one-two punch of a rising unemployment rate and falling housing values combine for a misery index higher than most of the U.S. (and if you work in the building industry here, I certainly don't need to tell you that!).

In a compelling article, The Economist reviews this phenomenon, and also discusses why the high rate of mobility among U.S. residents may be hampered by the inability sell a home:

YOU won't hear the R-word much in the modest governor's mansion in Helena, Montana. The occupant, Brian Schweitzer, insists that Montana's economy is in better shape than it has ever been. It has had one of the fastest rates of job growth in the country. The state is prospering on the back of booms in mining and farming, as well as steady growth in tourism. Paul Polzin of the University of Montana forecasts that the state's economy will grow by 4.1% this year, the fifth consecutive year of growth above 4%. “We've been searching for realistic doomsday scenarios,” he says, “and we just can't find any.”

Go to Michigan, by contrast, and it is hard to find anything but gloom. The collapse of America's car industry, coupled with a nasty subprime mortgage bust, has left the state reeling. It has the highest unemployment rate in the country (7.6%) and the third-highest foreclosure rate, and was the only state to lose a large number of jobs in 2007. In the run-up to the state's Republican primary (which he won) Mitt Romney traversed Michigan, promising to save voters from a “one-state recession”...

So far, much of the misery has been concentrated in one sector—housing—and in two distinct sets of states: the industrial Midwest and those states that saw the biggest housing bubble, particularly California, Nevada, Arizona and Florida. These two groups are disproportionately important politically. They include many states that voted early in the primary races. Several of them (such as Michigan and Florida) are traditionally swing states in the general election.

The situation is still grimmest in Michigan, Ohio and other erstwhile manufacturing strongholds, where the subprime bust came on top of the secular loss of factory jobs. But the most dramatic weakening has been in bubble states. Economies that were buoyed by booming construction and soaring house prices are now being dragged down...

Move inland from the coasts and away from the industrial Midwest, however, and the picture, for now, looks less grim. A belt running from Texas north-west across the Great Plains and the Rocky Mountains has been doing particularly well, thanks to soaring exports and high commodity prices. Ethanol subsidies and “agflation” have brought a bonanza to the farm states. Agricultural exports are up almost 20% compared with 2006, while farm incomes are growing smartly. Extractive industries are booming. Miners find it worthwhile to dig for copper in Butte, Montana, even though the operators say it is the worst-grade ore in the world. These states now have some of the lowest unemployment rates in the country. With far less of a housing boom, they have also avoided the worst of the subprime bust...

A downturn centred on housing will have pernicious effects, even on the regions it hits least. That is because it constrains one of the biggest safety valves in America's economy: people's ability to move. Previous downturns spawned sizeable migrations from recessionary states to booming ones. In the early 1990s, for instance, people flocked from New England to southern states. This time, that mobility is hampered by people's inability to sell their homes. Unemployment may go on rising in California, even though Montana cannot get the workers it needs.

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