Diminishing Margins: Housing Market Declines and Family Financial Responses

Published: 2012


We utilize data from the Panel Study of Income Dynamics (PSID) to study borrowing decisions and other factors related to the run-up in housing prices in 1999-2007, their precipitous decline in 2007-2009, and how they contributed to mortgage distress and foreclosures as of 2009-2011. Difficulties were concentrated in selected real estate markets where the Case Shiller home index declined more than 35% from 2007 to 2009. Often expecting further price appreciation or responding to a positive family labor market and income circumstance, homeowners, supported by their lenders, allocated too much of their family income to support house payments and put themselves in a risky position. The year of taking the original mortgage, the rate of decrease in the Case-Shiller home price index, household wealth, and labor market and disability status are substantial predictors of mortgage payment distress and foreclosure.

Key Findings

    • Using the Panel Study of Income Dynamics, we study the factors related to family level mortgage distress and foreclosure in the U.S. economy, 2007-2011.
    • The most substantial predictor of mortgage distress and foreclosure is the family’s allocation of a high share of family income to supplement cash flow and spending.
    • Higher values of housing payments to family income — HPI — were more common in markets with strong appreciation during the housing boom.
    • Substantial mortgage borrowing relative to current family income is an indication that the family expects a price rise to reward their current payment burden or that they simply have housing that is likely beyond their means.