Foreclosures appear to be more related to unemployment than to the cost of mortgages. A paper last week posted the National Bureau of Economic Research argues that when it comes to foreclosure, how expensive homeowners’ mortgages mattered – but not as much as other factors.
The paper compares the impact of high debt to income ratios at the time the home was purchased to unemployment as a factor in foreclosures. The study found that ten percentage point increase in a household’s mortgage debt increases the chance of delinquency by 7% to 11%. A one percentage increase unemployment income ratio increases ups the odds to 10-20%.
The longer unemployment is high, the greater the chance of foreclosure. Although we may have reached the bottom of this recession, foreclosures could continue to rise since unemployment is generally a lagging indicator.
We may not have seen the worst of it yet.
The ultimate lagging indicator may be homelessness. I have been unable to find research relating changes in unemployment and foreclosures on homelessness. However, it seems logical that the toxic combination of high unemployment and foreclosures could drive those at the margin into homelessness.
“What do these findings suggest for foreclosure-reduction policy?” the economists write. “One suggestion would be to focus a program on the effects of income volatility, helping people who lose their jobs get through difficult periods without having to leave their homes.”
We need to reexamine the safety net to meet this challenge.
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