The 2009 Economic Landscape 

The Sand States: Anatomy of a Perfect HousingMarket Storm 

The historic boom and subsequent decline in the nation’s 

housing market has been a defining feature of the current 

recession. The housing downturn has been most acute in 

four states—Arizona, California, Florida, and Nevada— 

that had experienced some of the highest rates of home 

price appreciation in the first half of the decade. While 

these states are not all contiguously located, their similar 

housing cycles and abundance of either beaches or deserts 

have led some analysts to label them “Sand States.” This 

article discusses the factors that led to an expanding 

housing sector in these states and the market imbalances 

that culminated in a sharp correction in home prices. 

The article also explores the ripple effects that the housing downturn has had on the local economies. 

Rapid Population Growth in the Sand States 

Propelled Housing Markets 

For many years, rapid population growth in the Sand 

States spurred higher than average rates of home 

construction. Favorable weather and relatively affordable housing are two factors that attracted retirees as 

well as younger families to these states. In the 1980s 

and 1990s, population growth rates in Arizona, Florida, 

and Nevada were between two and four times the 

national rate. Certain parts of California, such as the 

Riverside–San Bernardino metropolitan area, experienced similarly high rates of population growth. Rapid 

population growth continued into the early years of this 

decade. From 2004 to 2007, Arizona and Nevada 

ranked as the two fastest growing states in the nation, 

followed closely by Florida, which ranked ninth.1 

The influx of new residents into Arizona, Florida, and 

Nevada also contributed to strong employment growth. 

Job creation in these states frequently outpaced the rest of 

the nation during the past few decades. From 2000 to 

2006, these states repeatedly ranked among the top ten 

for job growth, far exceeding the national average. 

California generally reported job growth similar to the 

national average during this period, although the state was 

hit hard by the dot-com recession from mid-2001 to 2003. 

1 U.S. Census Bureau. 

Affordability Mortgages Contributed to 

Housing Imbalances 

During this decade, strong demand for housing, 

supported by a growing population and an expanding 

economy, contributed to growing housing market 

imbalances across the Sand States. Perhaps the best 

measure of the imbalances that accumulated in booming housing markets during this decade was the relationship between home prices and incomes. In the years 

leading up to the housing downturn, escalating home 

prices far outpaced income growth. For example, in 

2003, housing in Nevada was considered relatively 

affordable, both in absolute terms and as compared to 

other states. According to one analysis, a family earning 

the median income in Nevada in 2003 could afford a 

home that was priced approximately 20 percent above 

the median house price in the state using traditional 

mortgage financing.2 However, by late 2005, home 

prices had risen so much that a family earning the 

median income could only afford a home priced at 

24 percent below the state’s median price. 

A combination of factors drove the housing sector 

imbalances in the Sand States to unprecedented levels. 

Under normal market conditions, strained affordability 

tends to limit housing demand because fewer households can purchase a home using traditional mortgage 

financing. However, in this cycle, new mortgage “affordability” products were commonly used to finance home 

purchases. Besides traditional adjustable-rate mortgages 

(ARMs), affordability products included hybrid ARMs, 

which have a low, fixed interest rate for several years 

followed by a market rate that is frequently much 

higher. Affordability products also comprised the 

so-called nontraditional mortgage products, which 

included interest-only loans, where amortization of principal was not required during the first few years of the 

2 Moody’s Economy.com Affordability Index. The calculation assumes 

a 30-year maturity and a down payment of 20 percent. It also assumes 

that the monthly principal and interest payments do not exceed 25 

percent of the median family income. To interpret the indices, a value 

of 100 means that the family earning the median income can afford 

only 100 percent of the traditional mortgage payment of the medianpriced home, taking into consideration the 20 percent down payment. 

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2009 Economic Landscape 

loan; negative-amortization loans that offered initial 

payments well below the amount required to cover 

interest and amortize principal; and balloon payment 

loans, which typically required a large lump-sum 

payment at the end of the loan. Unlike subprime mortgage products that were designed for home buyers with 

limited or weaker credit histories, these nontraditional 

mortgages were marketed broadly and often used by 

first-time home buyers and investors who did not 

provide a down payment. In addition, originators of 

these products frequently did not require buyers to verify 

that their income could support the mortgage payments. 

By 2006, nearly half of total U.S. originations of privately 

securitized affordability mortgages were made in the four 

Sand States alone. Moreover, the proportion of these 

mortgages originated in these states, including nontraditional mortgages, rose as home prices escalated. During 

2002, these products accounted for roughly half of the 

privately securitized mortgage originations in each of the 

Sand States, comparable to the rest of the nation. By 2006, 

however, the proportion of these products had increased to 

80 percent of privately securitized mortgage originations. 

Nationwide, the percentage was about 70 percent.3 

The increased presence of speculators or investors in the 

Sand States also contributed to growing imbalances in 

the housing sector. Data from mortgage servicers indicate 

that nonowner, investor, and second-home mortgage 

originations increased noticeably in Arizona, Florida, and 

Nevada between 2000 and 2005.4 Investor and secondhome purchases tended to be more heavily concentrated 

in major metropolitan areas in these states, such as 

Las Vegas, West Palm Beach, Miami, and Phoenix. 

Strong housing demand coupled with escalating home 

prices served as a dual incentive for builders to increase 

the supply of homes, arguably at a rate that exceeded 

short-term demand. New home construction started to 

accelerate in 2002, and, over the next three years, 

housing starts in these four states increased an average 

of 11 percent annually, or about twice the rate of 

increase elsewhere in the nation. Housing construction 

in the Sand States far outpaced annual growth in the 

number of households, which peaked at 1.6 percent in 

2004 and 2005. 

3 Data are from Loan Performance. Affordability mortgage products 

include ARM loans, interest-only loans, negative amortization mortgages, 

balloon loans, and hybrid ARMs. Affordability originations are measured 

as a percentage of privately securitized origination, first liens only. 

4 In contrast, California had less investor activity during the period, 

likely because the median home price in the state was relatively high, 

resulting in a less attractive rate of return for potential investors. 

Labor market imbalances also arose as job growth became 

skewed toward the housing sector. During the height of 

the boom, construction employment grew 10 percent per 

year in these states, far outpacing growth in other industry sectors. During this time, construction jobs accounted 

for a disproportionate 25 percent share of new jobs, while 

representing less than 10 percent of total employment. 

Tipping Point: Imbalances Lead to Housing Collapse 

Ultimately, the housing boom in the Sand States 

proved to be mostly a mirage. The first signs of trouble 

came in the form of sharply decelerating rates of home 

price appreciation. Between 2003 and 2006, annual 

home price appreciation rates in these states had consistently exceeded the national average. Year-over-year 

house price appreciation in Nevada peaked in 2004 at 

37 percent. In Arizona and Florida, appreciation peaked 

in 2005 at rates more than twice the national average. 

Since then, average home prices in the four states have 

declined between 27 and 38 percent from their peak.5 

Price declines have been most severe in metropolitan 

markets such as Phoenix and Las Vegas, which registered the largest percentage declines in the nation at 

34 percent and 33 percent, respectively, during 2008.6 

As home prices slumped, foreclosure activity rose at a 

startling pace. While this phenomenon was occurring 

across the nation, it was most pronounced in the Sand 

States. According to the Mortgage Bankers Association, the Sand States accounted for more than 40 

percent of all mortgage foreclosures started in 2008, 

which is nearly double the share of mortgages held by 

borrowers in these four states (see Table 1). This 

disproportionate share of troubled mortgages in the 

Sand States was most acute among ARMs. In 2008, 

these states held 46 percent of the prime ARMs 

outstanding nationwide and 64 percent of foreclosures 

started within this mortgage category. 

In fourth quarter 2008, foreclosure resales accounted for 

more than 55 percent of all California resale activity, 

almost three times the level of a year ago. Foreclosure 

resales were also prevalent in Las Vegas and Phoenix, 

where this type of transaction accounted for about 71 

and 65 percent, respectively, of house and condominium 

resales.7 

5 Federal Housing Finance Agency, purchase-only index data through 

fourth quarter 2008. 

6 S&P/Case-Shiller Home Price Index, data as of December 2008. 

7 Data Quick Information Systems through www.dqnews.com. 

Las Vegas and Phoenix data are for February 2009. 

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Table 1 Chart 1 

The Sand States Account for a 

Disproportionately High Share of 

Foreclosure Activity 

National Share of 

Foreclosures 

Started 

National Share of 

Mortgages 

Serviced 

California 

Florida 

Arizona 

Nevada 

19.2% 

16.2% 

4.4% 

2.7% 

12.9% 

7.8% 

2.7% 

1.2% 

Sand States Total: 42.5% 24.6% 

Source: Mortgage Bankers Association. 

Note: Data from first quarter 2008 through fourth quarter 2008. “Sand States” is the 

aggregate of California, Florida, Arizona, and Nevada. 

-20 

-15 

-10 

-5 

0 

5 

10 

15 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 

Year-over-Year Change in Sand State Nonfarm Employment 

Percent 

The Construction Sector in the Sand States 

Has Been an Important Driver of Job Growth 

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: “Sand States” is the aggregate of California, Florida, Arizona, and Nevada. “All Other 

Sectors” is the state aggregate nonfarm employment minus the construction sector. 

All Other Sectors 

Job Growth 

Construction Sector 

Job Growth 

Economic Conditions Remain Fragile as the Effects 

of the Housing Collapse Spread 

Compounding the housing-sector problems in the Sand 

States, and elsewhere, has been the virtual shutdown of 

private mortgage-backed securities (MBS) issuance 

since 2007. MBS issuance had largely financed the 

subprime and nontraditional lending that fueled the 

boom. Total issuance of private MBS, which had 

topped $1 trillion annually in both 2005 and 2006, fell 

precipitously thereafter, totaling just over $50 billion in 

2008. Meanwhile, the difficulties that market participants have had in valuing complex mortgage securities 

and the derivatives based on them have contributed to 

wider risk aversion in financial markets, which has 

reached historic proportions. For housing markets, 

particularly in the credit-fueled boom markets of these 

four states, these financial market disruptions are 

compounding what would in any case have been a steep 

and extended housing market downturn. 

The housing market downturn in the Sand States is 

now having serious ripple effects on other parts of the 

local economy. Each of the Sand States lost jobs in 

2008. The losses have been most pronounced in the 

construction sector, which has shed more than 450,000 

jobs, or about 24 percent, between fourth quarter 2006 

and fourth quarter 2008 (see Chart 1). In addition, job 

losses have spread to the financial services and retail 

trade sectors. Retail sales also have declined, particularly for home improvement, furniture, and electronics 

store sales, contributing to additional layoffs. 

Although the Sand States entered this downturn with 

relatively low rates of unemployment, joblessness 

increased during 2008 to levels not seen since the 2001 

recession. The unemployment rates for California, 

Florida, and Nevada ranked among the top ten in the 

nation as of fourth quarter 2008. While Arizona’s 

unemployment rate remained slightly below the 

national average as of fourth quarter 2008, it too rose 

markedly during the year. These rising unemployment 

rates are due primarily to widespread job losses and, to a 

lesser degree, to additional people entering the labor 

force in search of employment, including college graduates and retirees.8 Also, rising unemployment claims are 

putting more pressure on already strained state budgets. 

Nonetheless, a few positive, albeit very preliminary, 

signs may be emerging. The volume of home sales in 

Arizona, California, and Nevada improved during 

2008 relative to year-ago levels. The increase in foreclosures sales is likely contributing to some renewal in 

sales activity. In addition, while a sharp decline in 

housing starts is eliminating construction jobs in the 

near term, it should eventually facilitate the return to 

a more stable housing landscape. Seasonally adjusted 

housing starts in the Sand States dropped 40 percent 

in 2007 and again in 2008. Also, despite the weakened 

housing and labor markets, population growth in 

Arizona, California, and Nevada was estimated to be 

above the national rate in 2008.9 This continued 

growth will be an important source of long-term housing demand that will eventually help bring a measure 

of stability to these troubled housing markets. 

Authors: Shayna M. Olesiuk, Regional Manager 

Kathy R. Kalser, Assistant Director 

8 California Employment Development Department. 9 U.S. Census estimates of state-level population growth between 

July 1, 2007, and July 1, 2008, the latest data available. 

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