by Douglas A. McIntyre, Michael B. Sauter and Charles B. Stockdale
Tuesday, January 18, 2011

The single biggest problem in the U.S. real estate market is simple: There are very few homebuyers.

That seems obvious, but the "buyers' strike" has caused house prices to drop, along with an epidemic of foreclosures. What's worse, the long depression in real estate is probably not over. S&P has forecast that home prices will drop by 7% to 10% this year. The S&P Case-Shiller Index has dropped for most of the 20 largest real estate markets over the last several months. RealtyTrac recently reported that more than 1 million homes were foreclosed upon in 2010.

Many economists argue that the housing market may take four or five years to recover. Even if that's proven to be true, the all-time highs of 2006 may never be reached again.

The devastation in some regions will never be repaired. Parts of Oregon, Georgia and Arizona have become progressively more deserted. Since jobless rates may never recover, there is little reason to hope that the populations in these areas will ever rebound. Some homes will be torn down in these pockets of high foreclosures in the hopes that reducing supplies will boost prices. Whether that idea will work in hard-hit areas such as Flint, Mich., and Yuma, Ariz., remains to be seen.

24/7 Wall St. looked at a number of the standard measures to find the housing markets facing the biggest problems attracting buyers. After a detailed examination, six metrics were chosen: (1) vacancy rates for 2010; (2) foreclosure rates for 2010; (3) November 2010 unemployment rates; (4) change in building permits from 2006 to 2010; (5) change in population from 2005 to 2010; and (6) price reduction by major cities for 2010. Taken together, they create a strong statistical base to describe markets which buyers have largely abandoned.

Several states nearly made it onto the list, such as Colorado and South Carolina, but did not get poor enough marks across all of our measurements. Each was among the 10 worst for declines in building permits. Colorado had one of the worst foreclosure rates, and South Carolina one of the worst vacancy rates. However, the populations in both states have rebounded enough to make a strong case that their housing markets may recover moderately over time.

The review of the data raises several public policy issues. The most important of these is whether the federal focus on reviving the housing market should be concentrated in the hardest hit regions. The counter to that point of view is that some cities, such as Flint, or states like Nevada are in such bad shape that they are beyond assistance. Unemployment rates are too high in these areas, and perhaps the number of homes on the market is too large.

One thing is certain. The housing recovery will be wildly uneven. A city like New York, which has a dense population and large numbers of middle class and upper class buyers who will wait until they believe prices hit bottom, will have a rapid recovery soon. Building permits granted in New York City over the last four years have been very low. The supply of apartments is also low. Those forces taken together with an even modest economic recovery will help push real estate prices higher in New York and regions with similar characteristics.

The real estate crisis has gone on for four years. In the states 24/7 Wall St. has chosen here, the crisis will go on much longer.

1. Michigan

Vacancy Rate: 15.98% (9th Worst)
Unemployment: 12.4% (Tied for 2nd Worst)
Population Change 2005-2010: -2.05% (Worst)

Michigan is one of only two states whose population has decreased in the last five years. The state has lost more than 2% of its population since 2005. Most of this population loss was undoubtedly due to the depression in the car industry that led to the bankruptcies of GM and Chrysler. Flint, once one of the largest car manufacturing cities in America, has lost more than 10% of its population in the past 10 years. The state has the second-worst unemployment rate in the country at 12.4%. Michigan has a home vacancy rate of 15.98%, the ninth-worst in the U.S. There are large neighborhoods in Detroit that are vacant.

2. Nevada

2010 Foreclosures: 9.42% (Worst)
Unemployment: 14.3% (Worst)
Decrease in Building Permits 2006-2010: -84.39% (Worst)

In 2010, an incredible 9.42% of all housing units in Nevada were foreclosed upon. This is by far the highest foreclosure rate in the U.S., and is nearly twice that of the next-worst state. Nevada also has the highest unemployment rate in the United States, at 14.3%.The recession undermined profits in the gaming industry. Between 2006 and 2010, the state had an 84.3% decrease in building permit requests, the largest drop in the country. This has resulted in the loss of tens of thousands of construction jobs.

3. Arizona

Vacancy Rate: 17.3% (5th Worst)
2010 Foreclosures: 5.73% (2nd Worst)
Decrease in Building Permits 2006-2010: -81.36% (4th Worst)

Arizona is among a handful of states most deeply wounded by the real estate collapse. Some 5.73% of properties in the state have been foreclosed upon, the second highest rate in the country, and 17.3% of homes are vacant, the fifth greatest rate in the country. Also, Mesa, Phoenix and Tucson, the state's three largest cities, are all among the top five American cities with the greatest percentage of price reductions for homes in 2010, along with Minneapolis and Baltimore. As of December 2010, these cities had 43%, 42% and 38% of their listings with price reductions, respectively.

4. California

2010 Foreclosures: 4.08% (4th Worst)
Unemployment: 12.4% (Tied for 2nd Worst)
Decrease in Building Permits 2006-2010: -74.7% (6th Worst)

California's impact on the housing market is huge. The state is the largest among the 50 in total GDP and housing units. California's unemployment rate of 12.4% is now tied for second place with Michigan, once the jobless capital of the nation. In 2010, the state had one of the highest foreclosure rates in the country, at just over 4%. New construction has dropped off dramatically as well, with a 74 % decrease in new building permits between 2006 and 2010.

5. Illinois

2010 Foreclosures: 2.87% (9th Worst)
Decrease in Building Permits 2006-2010: -81.32% (5th Worst)
Population Change 2005-2010: 1.23% (8th Worst)

Although Illinois has a relatively low residential vacancy rate, finding people to buy homes can be difficult. The state's population only grew 1.23% between 2005 and 2010. This is the eighth worst growth rate in the country. Furthermore, the number of building permits issued since 2006 decreased 81.32%, the fifth greatest drop in the nation. The collapse of the state's industrial base has been so great that its economy will not recover anytime soon.

6. Georgia

2010 Foreclosures: 3.25% (6th Worst)
Unemployment: 10% (9th Worst)
Decrease in Building Permits 2006-2010: -82.29% (2nd Worst)

The number of building permits issued in 2006 in Georgia was 92,541. In 2010 that number dropped to 16,391. This is the second greatest decrease in the nation during that time. The state's unemployment rate, at 10%, is above the national average of 9.4%. Also in 2010, there were 130,966 foreclosures in Georgia, 3.25% of the state's properties. This is an increase of 53.62% since 2008.

7. Oregon

Unemployment: 10.6% (Tied for 5th Worst)
Decrease in Building Permits 2006-2010: -74.08% (7th Worst)
Number of Listings With Price Reductions (Portland): 35% (Tied for 8th Worst Among 50 Largest U.S. Cities)

Oregon's real estate market has suffered the double blow of a sharp drop in both building permits and price reductions on existing homes. Unemployment is 10.6%, the fifth worst rate in the country. The number of new building permits decreased by 74% from 2006 to 2010. In December 2010, 35% of listings in Portland, the state's largest city, had price reductions.

8. Florida

Vacancy Rate: 21.03% (2nd Worst)
2010 Foreclosures: 5.51% (3rd Worst)
Decrease in Building Permits 2006-2010: -81.37% (3rd Worst)

Unemployment in Florida is 12%, the fourth worst in the country. Approximately 1.1 million residents are out of work. Statistics show that 21.03% of the state's housing units are vacant. Furthermore, 5.51% of homes have been foreclosed upon. Florida was among five states that had the largest real estate booms from 2000 to 2006. Residential prices in some waterfront areas like Miami and Palm Beach rose by much more than double during that period. New home and condominium construction soared. Many of those residences have never been occupied and are still part of the inventory of homes for sale.

Sources:

1) Vacancy rates for 2010 -- American Community Survey (Census Bureau)
2) Foreclosure rates for 2010 -- RealtyTrac
3) November 2010 unemployment rates -- Bureau of Labor Statistics
4) Change in building permits from 2006 to 2010 -- Census Bureau
5) Change in population from 2005 to 2010 -- Census Bureau
6) Price reduction by cities for 2010 -- Trulia