The economies of 10 states are outperforming the US economy as a whole, according to a just-released study by the Nelson A. Rockefeller Institute of Government, an independent research group in Albany, NY, which analyzes state and local government.
The two biggest reasons, say the authors of the report, are that most of these states have economies that benefited through much of 2008 from high and rising oil and natural gas prices, and their real estate markets have not suffered the bust to the extent seen elsewhere.
“As for lessons for other states, they’re not too easy to emulate,” says Donald Boyd, co-author of the report. “Have a lot of oil, and don’t run your real estate prices up into the stratosphere.”
Mr. Boyd and other analysts say that the ten states (Alaska, Wyoming, Louisiana, Nebraska, Texas, Iowa, New Mexico, Utah, Oklahoma, and South Dakota) did not enjoy the real estate boom seen in places like California, Arizona, and Nevada – and therefore have not gone bust to the same degree.
That's because banks did not practice what Bob Denk of the National Association of Home Builders (NAHB) calls the “grotesque deterioration of lending standards” which fueled housing demand and produced rapid price increases.
“There was a lot of wacky lending practices everywhere, and so it’s just a matter of degree how overheated any of these markets got,” says Mr. Denk.
Markets on both coasts started with “the noble goal of trying to extend home ownership to those who might not qualify under stricter rules” he says. Whereas in 2001, only about one percent of the nation’s housing loans were in the sub prime category, the national average now is 5.5 percent. Nevada is now at 12.5 percent after dropping back from 13 percent. California and Arizona are in the 8 percent range, Denk says.
Less boom means less bust
“I don’t think there is a great mystery here,” says David Merriman, professor of public administration at the University of Illinois at Chicago. ”These are states that had less boom and so have less bust. They are relatively favored by industrial composition.”
Where jobs are stable, housing remains more stable as well, point out other economists. A lower cost of living makes a difference too.
“Insurance, fuel, food, recreation are all examples of categories where we enjoy lower costs compared to other larger markets outside of the Midwest,” says Doug Burnett of Burnett Realty in Des Moines, Iowa. “That is more attractive to employers that need workers, and it is a factor when someone is making decisions about staying put or moving away.”
Burnett says it will not shock most people to learn that the middle of the county tends to be more conservative in everything from their investments to their clothing purchases -- and buying homes is no different.
“Since there is relatively little experience with the ‘boom’ housing other markets have experienced there is not an expectation to have to participate in out of sight housing prices,” Burnett says. “There has been a relative run up in our market; but in our market we tend to experience and expect three to four percent appreciation per year over any reasonable time frame of, say, three to five years. Not real sexy but it is comforting.”
Diversification is a key
Susan Ramsey, senior vice president for the Greater Des Moines Partnership, says the city’s and state’s decade-long quest to become more diversified has also helped. The state learned its lesson after an oil boom there from 1978 to 1986, she says, and it has been preparing for just this kind of recent economic scenario.
There are now 75 top insurance firms domiciled in Des Moines and an emerging wind and ethanol industry. A heavy investment in infrastructure has provided a kind of investment momentum that inspires consumer confidence as well, she says. Some $2.5 billion in investment has meant lots of cranes in the sky in the state capital.
“Iowans don’t rattle easily,” Ms. Ramsey says. “People have pulled in their belts, but there’s not shorter lines in restaurants, or movies, or retail stores. There continues to be a basic confidence in the marketplace.”
“Everything we have done since then has been careful and calculated,” she says, “so that we would survive in a time just like today.”
Economists say that when people are employed they pay taxes and spend money on goods and services.
“They buy houses and pay property taxes and tend to stay put and buy more goods and services to fix up their homes, all of which means more revenue for the state in sales and property taxes,” says Burnett, the realtor in Des Moines.
“In this context, when we say ‘build it and they will come,’ we mean build jobs,” he says. “Cities and states that make job creation a priority will find the partners and stakeholders that provide necessary infrastructure like housing and services. As demand for housing goes up, so go the prices.”