March 2, 2009, 5:59 pm Foreclosure Rates Aren’t Really That High … By Catherine Rampell
…unless you live in Arizona, California, Florida or Nevada.
A new study takes issue with the media narrative that foreclosures are dangerously widespread. The paper’s authors, William Lucy and Jeff Herlitz at the University of Virginia, examined foreclosure rates in every state, 35 metropolitan areas and 236 counties, and they found that 62 percent of foreclosures in 2008 were in the four states mentioned above.
California in particular was responsible for a disproportionately high number of foreclosures. The state may have had only 10 percent of the nation’s housing units, but it had 34 percent of the nation’s foreclosures in 2008. (Nevada, however, had the highest foreclosure rate, as you’ll see in the map below.)
California was especially vulnerable, the authors wrote, because the homes that its residents bought were quite expensive compared with their incomes.
The median value of owner-occupied housing in 2007 was 8.3 times median family income, the authors found, while the 2007 national average was 3.2. Housing costs relative to incomes were especially high in the Los Angeles metropolitan area, “where more than 20 percent of mortgage holders in each county were paying at least 50 percent of their income in housing related costs,” the authors wrote.
The authors proposed a few possible explanations for why housing prices got out of hand in California:
The huge run-up in housing prices in California created opportunities for large gains for home buyers if price increases continued. Thus, more households may have been attracted to potential gains, worried, perhaps, that they would be priced out of the home buying market if they did not act quickly. Some lenders (Countrywide) specializing in subprime, no principal, interest only, and no income check loans got their start in California and focused there. Perhaps the expansion of prime home-buying age groups up to 2004 was followed by a decline in these groups in California, on par with or greater than the national demographic transition. Perhaps public policies had some effects, such as hindering infill construction and transit-oriented development in the City of San Francisco and other attractive cities and inner suburbs. And perhaps Proposition 13 was influential. Because Proposition 13 limited property tax increases to one and one-half percent per year, home buyers could buy with a low interest ARM, perhaps interest only, for two or more years, pay little more in property taxes in the second and third years as their property value increased, and sell at a substantial profit in two or three years before the reset ARM higher interest rate became too burdensome—an attractive opportunity for some young buyers anticipating moving.
Whatever the reason (and feel free to leave your own explanations in the comments), figuring out why certain markets experienced particularly steep booms and busts should generate a lot of bubble-prevention-orie... policy research in the coming years.
For more on this subject, see some previous posts by our Daily Economist Edward L. Glaeser, who has written about unsustainably high housing prices in some other Sun Belt cities.
UPDATE: Several readers have written in asking about the source of the authors’ foreclosure numbers, which do not match some other reported numbers for foreclosure rates. Here is how the authors described their chosen data sources:
Foreclosure data are difficult to compare from one source to another. The “foreclosure” label may include delinquency notices, formal filings of intent to foreclose, repossessions through foreclosure processes, and property sales via sheriffs’ auctions. These processes may be interrupted by delinquencies being paid, changes in lenders’ enforcement policies, or legislation requiring delays in foreclosure proceedings. The same property may be listed multiple times (Olick 2007).
Up-to-date sources, like RealtyTrac.com and foreclosure.com, aim their services at potential buyers of foreclosed properties. RealtyTrac’s data for foreclosure proceedings (2.3 million) more than doubled the foreclosure rate of foreclosure.com in 2008. But RealtyTrac reported “more than 860,000 properties were actually repossessed by lenders” in 2008 (Associated Press 2009). Foreclosure.com’s website said “home foreclosures jumped 64% to nearly one million homes in 2008.” In our study, we used foreclosure.com data for states and counties, usually from November 2008. The U.S. number of foreclosures and preforeclosures in that source was 1,009,485…
Different data comparisons can yield different impressions. Here we compare foreclosures to housing units to arrive at a foreclosure rate. Comparing foreclosures to mortgages is more common and yields a higher rate as well as leaves out owner-occupied housing where mortgages have been paid completely (32 percent of owner-occupied dwellings). This method also diminishes the importance of rental housing (32 percent of housing nationwide and 46 percent of housing in central cities) on which there are fewer foreclosures. By comparing foreclosures to housing units we include all housing. This measure, however, understates the burden of delinquent mortgage payments on lenders. With 51 million mortgages in 2007, one million foreclosures would be two percent of all mortgages, a major increase from the previous norm of 0.4 percent of mortgages starting the foreclosure process from 1997 to 2006.