Tough Mortgages, even in a Boomtown

The housing boom and bust did not hit my state of North Dakota, in large part because the whole sub-prime loan concept was driven by the expectation that housing prices would continue to increase year on year.  Thus, equity would be built relatively quickly though appreciation of the home’s value (assuming, of course, the homes continued to appreciate).   That was never an issue in North Dakota.  Housing prices tend to stay stable with modest increases year to year, so there were no lenders offering sub-prime options. In fact, North Dakota trails only Vermont in the number of foreclosures. 

The New York Times reports that the housing crisis is having an impact in western North Dakota, and not really in the way you might expect.  In Williston, ND, where the oil business is continuing its strong growth, the city may have grown by as many as 3,000 residents in the last couple years (from 12,000 to possibly 15,000).  This has made housing a premium and leaving many sleeping in campers, basements, and even cars. 

Williston is the one place that has had a relative real estate boom.  Prices there increased by about 24% in both 2006 and 2007.  In contrast, Fargo, the state’s largest city, saw home values increase 2.5% and 3.8%, for the same respective years, and statewide home prices increased 3.7% (2006) and 6.8% (2007).  

Despite full hotels and apartments, there are a few houses on the market in Williston. However, as the area’s population explodes, many of the newcomers are leaving behind lost jobs, and, often, homes in foreclosure, meaning that home loans are out of the question.

This all provides a great example of basic economics.  The market is, in one sense, working perfectly here.  Housing prices are increasing in places where there is low supply and high demand, and falling in places where there is a surplus of homes and low demand.  But great numbers of people are still struggling

When we talk about efficient markets, it is often easy to overlook the extraneous costs, including human costs, related to the process.  I believe very much in the value of the market, but I also think we need to do a better job of regulating some markets to help ensure good information filters to all in the marketplace.  For example, when banks were providing 100% loans for homes that had doubled in value in the three prior years, they were sending buyers a signal:  this housing market will continue.  And buyers listened, even though it was wrong.  Buyers need to take responsibility for what they purchased, but the lenders need to own their role in this, too.  And if they won’t do it on their own, we all have an interest in making sure it happens anyway.   

--Josh Fershee