| Some Truth About Historical Foreclosure Rates, Please |
| Written by Jonathan Smoke | |
| 09.17.2008 | |
Discuss this article on the forums. (0 posts)  The financial market woes of the last few days has caused me to pause and seek out lots of opinions and information. As my colleague Bill Russell likes to remind me, the best forecast is an average of several. So what happens next should be found in the opinions of the mainstream, the optimistic and the pessimistic.We are clearly in a period of rapid change and unrest. People are afraid of what may come next, and that fear can be whipped up to support changes that can hurt rather than help over the long term. As a seeker of intelligence, my greatest fear is that false or bad information can lead people to believe the wrong thing about the world around them and thus even dismiss their own observations to the contrary. So I am seeking some historical truth. As I began surveying the current zeitgeist, I came across a recurring “fact” being cited repeatedly: that the rate of foreclosure activity is now consistent with what was seen in the Great Depression. This sounded like a worthy statement to study and determine what this means for what lies ahead. The problem is that fact seems impossible to verify. There are several places that this concept seems to have spontaneously combusted. First, there was a widely quoted statement by Rick Sharga, VP of Marketing at RealtyTrac in July about June’s reported foreclosure activity: “Foreclosure activity is the highest since the Great Depression of the 1930s.”
There have already been a few pieces noting that absolute levels of foreclosure are irrelevant comparisons as the country, the population, the number of households, the number of mortgages and the size of the housing stock is dramatically larger today than in 1930. So I will move on to a more troubling observation. In August there was a statement released by the Center for American Progress, in which they referenced the July RealtyTrac numbers. Here is an excerpt of that statement by Andrew Jakabovics entitled, “Foreclosure Stats Say It's 1930 Again: Banks now own same share of homes as beginning of Depression.” “It's 1930 all over again. While cheerleaders for the real estate industry proclaim the housing markets are ready to turn the corner, with first-time homebuyers ready to jump into the market, the reported 55 percent increase in foreclosure activity over last July should put a damper on the excitement. July marks the third month of accelerating increases in foreclosure activity reported by RealtyTrac and an unbroken streak going back to January 2006 of year-over-year increases in monthly foreclosures. With RealtyTrac reporting in excess of 750,000 bank-owned properties, we estimate that nearly 0.6 percent of all housing units in the United States are now bank-owned. While this may appear to be a small slice of the total housing stock, this is the same ratio of foreclosed properties to housing units in 1930. Foreclosures increased steadily from 1930 until peaking in 1933, at which point 10 percent of all homes had become bank-owned. They did not return to pre-Depression levels until 1938.”
They did not issue a statement in August when Realty Trac’s Foreclosure Pulse blog reported: “Could a flood of foreclosures that began to swell last year be close to cresting? That could be a first-blush interpretation of the numbers in the RealtyTrac U.S. Foreclosure Market Report released today… [The] annual rate of increase in all three foreclosure actions tracked in the report -- defaults, scheduled auctions and bank repossessions -- slowed in August.
The rates of annual increase in defaults and scheduled auctions have been steadily slowing down each month this year, but this was the first month in which the rate of increase in bank repossessions (REO) has slowed since the beginning of the year.” But, I digress. So Jakabovics based his calculation of 0.6% in his August statement from the same day news release from RealtyTrac, which reported, “RealtyTrac now has more than three quarters of a million properties in its active REO database.” The 0.6% calculation means there are 125 million existing homes in the U.S., which is in the right ball park. According to the 2006 American Community Survey from the Census Bureau, it’s 126,311,823. So, 0.6% is close enough. According to the census of 1930, there were just under 30 million homes in the U.S. in 1930. So if the rate is the same, we need a statistic on bank foreclosed homes in 1930 of approximatley 180,000. The problem is that I can’t seem to find a foreclosure or REO number for 1930. The government does not track foreclosures or REO properties. The census refers foreclosure inquiries to the Mortgage Bankers Association, which only reports foreclosures back to 1990. But in the course of looking for this data, I did find an excellent article by David C. Wheelock, the assistant vice president and economist at the Federal Reserve Bank of St. Louis. He wrote “The Federal Response to Home Mortgage Distress: Lessons from the Great Depression,” which was published in the May/June 2008 issue of the Federal Reserve Bank Of St. Louis Review. Here are some relevant stats revealed in the paper, though they are not directly applicable to the ratio cited above: “At its worst, in 1933, some 1,000 home loans were foreclosed every day (Fifth Annual Report of the Federal Home Loan Bank Board, 1937, p. 4)… The foreclosure rate increased continuously from 1926 to 1933, then declined slowly over the remainder of the period. The foreclosure rate exceeded 1 percent (10 per 1,000 mortgages) in each year from 1931 to 1935 and did not fall below the rate for the year 1926 until 1941….
A broader measure of home mortgage distress is the rate of mortgages with past due payments. Comprehensive data on mortgage delinquency rates do not exist for the 1930s. However, a study of 22 cities by the Department of Commerce found that, as of January 1, 1934, 43.8 percent of urban, owner-occupied homes on which there was a first mortgage were in default. The study also found that among delinquent loans, the average time that they had been delinquent was 15 months. Among homes with a second or third mortgage, 54.4 percent were in default and the average time of delinquency was 18 months. Thus, at the beginning of 1934, approximately one-half of urban houses with an outstanding mortgage were in default (Bridewell, 1938, p. 172). For comparison, in the fourth quarter of 2007, 3.6 percent of all U.S. residential mortgages and 20.4 percent of adjustable-rate subprime mortgages had been delinquent for at least 90 days.” And I can add to a comparison from what Wheelock reported. The foreclosure rate increased 68% from 1930 to 1933 using the data Wheelock cited from the Historical Statistics of the United States, Earliest Times to the Present: Millennial Edition (Cambridge University Press, 2006). So, if 1,000 home loans were foreclosed every day, that’s 365,000 foreclosures in 1933. If we can keep the amount of housing constant (which it did grow a little, but for simplicity sake it makes the computation easier to understand), then the number of foreclosed homes in 1930 was likely closer to 217,250. Therefore, the ratio of foreclosed homes to total housing structures in 1930 was more like 0.73%, or more than 22% higher than the estimated 0.6% current rate. If you have better data to shed light on the historical comparison, please post a comment or contact me. I’m all for learning from history and surveying contrasting views so we all can make an intelligent decision about the best path forward. The only side I am cheering for is the one that is intelligently informed. 
We're always looking for feedback from our readers.
No. 1 : Correction to paragraph A reader helped us identify two mistakes in this article in one of the last paragraphs that caused some confusion. The original second to last paragraph ended with the following sentence: "...Therefore, the ratio of foreclosed homes to total housing structures was more like 7.3% or more than 22% higher than the 1930 rate." It should have read as follows: "...Therefore, the ratio of foreclosed homes to total housing structures in 1930 was more like 0.73%, or more than 22% higher than the estimated 0.6% current rate." |
| < Prev | Next > |
|---|
