Diminishing Margins: Housing Market Declines and Family Financial Responses

Authors

Abstract

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.

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Project

Paper ID

WP 2012-276

Publication Type

Working Paper

Publication Year

2012