Prices and Foreclosures

It’s no surprise that falling prices are correlated with high foreclosure rates across the 20 cities in the S&P/Case-Shiller Home Price Indices.  Using data from RealtyTrac for the 20 cities, we  calculated a foreclosure rate over the period since home prices peaked in June 2006.  The data covers notices of default, auctions and REO (real estate owned by the lender).  The figures are compiled each month and a house is only counted once in any month even if it goes through two or more foreclosure steps. However,  the same house could be counted in different months, so the totals summed for the entire period may be high.  We calculated a foreclosure rate over time by taking the total number of foreclosure related actions from June 2006 when the market peaked to May 2011 and dividing by the number of homes in each city in May 2011.  When compared to the peak-to-trough price declines for each of the 20 cities, prices drops and foreclosure events are correlated at 87%. Dropping Las Vegas which had a foreclosure rate roughly twice the next highest city, Phoenix, would boost the correlation to 98%.

Digging into the details and ranking the cities by foreclosure rates and how far prices fell reveals some differences across cities.   Among the cities with the largest price drops we also find the highest foreclosures. But past the top four, the pattern, as shown in the chart, is more varied. San Diego prices fell a bit less than either Los Angeles or San Francisco but experienced more foreclosures. Minneapolis, ranked 9th by price declines was ranked 15th on foreclosures. Dallas was the reverse — smallest price drop but 14th of 20 in foreclosures.  (see chart) Some of the differences relate to state laws.  In New York and Massachusetts (Boston), foreclosures go through the courts and the

Price Declines and Cumulative Foreclosure rate

Prices and Foreclosures

backlogs are large; in Nevada most cases are settled outside the courts with a trustee.   So, falling prices are associated with rising foreclosures but, as with most things in real estate, where the house is can make a big difference.

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