Tuesday, September 23, 2008

A break from finance: State personal income data cannot explain the housing bubble

As we wait for the outcome of the bill that gives the U.S. Treasury discretion over spending $700 billion, I decided to go back to economic posts. The Bureau of Economic Analysis released state personal income statistics for 2008.2 (the second quarter of 2008). Overall, the data is clouded by the Economic Stimulus Act of 2008, but Texas remains resilient with its strong oil and gas income growth.

As a primer, let’s first define Personal Income, which is the income received by all persons from all sources. Personal income is the sum of net earnings by place of residence, rental income of persons, personal dividend income, personal interest income, and personal current transfer receipts.

Source: Bureau of Economic Analysis (click to enlarge)

The highlights of the release in bullet points:

  • U.S. personal income grew 1.8% over the second quarter of 2008
  • Growth accelerated in all states except New Jersey, Minnesota, North Dakota, South Dakota, and Wyoming.
  • 2008.2 growth was highest since 2007.1 across all states (except for the five above), where the Economic Stimulus Act of 2008 accounted for almost all of the acceleration.
  • In the first quarter (release before the rebate program), growth contracted (negative) in the following states: Arkansas, Louisiana, Idaho, and Nevada.
  • Professional services, state and local government, and health services contributed the most to income growth, while reduced earnings in construction, and retail trade dragged down income growth.
  • The Southeast region grew the most (2.2%) above the national average (1.8%). The tax rebates had their largest impact here since the rebates were targeted to low-income households. Without the rebate program, the region grew 0.8%.
  • Net earnings in Texas (earnings less contributions for government social
    insurance, plus an adjustment to convert earnings by place of work to a place-of-residence basis) grew over twice the pace of the U.S. in 2008.1 and 2008.2; this is indicative of strong labor conditions in Texas stemming from growth in the oil and gas industry. Good place to go for a job, even in construction, since construction income contributed 0.11% to income growth in Texas but subtracted -0.06% from income growth nationally.
Going forward, expect more income contractions regionally in 2008.3 and 2008.4 as the labor market deteriorates further (national unemployment rate expected to rise slightly above 6.1% in the second half of 2008) and the Economic Stimulus Act of 2008 wears off. The regions with focus on manufacturing, esp. the Great Lakes region, will likely suffer the most.

Long-term income growth did not produce a housing bubble (click to enlarge).
The scatter plot lists income growth across two decades for 48 states, excluding outliers Wyoming and Nevada. Wyoming experienced a surge in growth in the 2000s (114%) and relatively low growth during 1990s (73%), while Nevada’s growth was high in both decades: 160% in the 1990s and 100% in the 2000s. The states highlighted in RED represent the 10 states with the highest number of foreclosures in August 2008.
Source (click to enlarge): Realtytrac.com

Except Nevada, there is no correlation between regional income growth over a longer time horizon and number of foreclosures. One would think that those markets with the strongest income growth – especially in the 2000s – would produce the most foreclosures if households perceived strong income growth as an incentive to leverage themselves into a high mortgage. However, this thinking is not evident. Even those states that experienced relatively low income growth spanning the 1990s and 2000s, e.g., Michigan and Ohio, are among the states with the greatest number of foreclosures. Clearly, there are size adjustments that need to be made (i.e., Texas’ population is much larger than Illinois’), but the lack of relationship between income growth and housing foreclosures is interesting.

Along with the U.S., regional income patterns are set to slow. However, if one must move for better labor market conditions, Texas is the best place to go. And as oil inventories continue to shrink and oil prices will remain high ($107.52/barrel at close on Sept. 22), Texas will continue to prosper.

Please leave comments. Rebecca Wilder


  1. Knowing that western state growth (not to CA)is due in part to more senior people moving to a better life style means that people who can better afford a home are buying in those locations. Arizona and Florida are more likely to attract people of all ages with less income? People who can are bailing out of CA but more to Nevada/Oregon/Idaho areas.

  2. "One would think that those markets with the strongest income growth – especially in the 2000s – would produce the most foreclosures if households perceived strong income growth as an incentive to leverage themselves into a high mortgage. However, this thinking is not evident."

    Agreed. I find it interesting in that DC proper - which has experienced the greatest growth differential between the 2 decades (on your scatter graph) not among the foreclosure leaders. Realty track has their performance at slightly better than the national average.

  3. Hi CRT,

    Thanks for the comment. According to Realtytrac.com, DC had 629 new foreclosures in August. This is the 36th highest in August (only the top ten are shown above), however, Virginia is number 12.

    To see the full list, go to Realtytrac.com, scroll to the section that reads "New! Information Centers", then click on "foreclosure trends," and then scroll to the bottom of the page to see the illustration in the blog. I believe that DC is on the fourth page link for "new foreclosures in August."