Other Factors Moderate Foreclosure Impacts on Home Prices Rising foreclosure rates will not cause U.S. home values to plunge, despite widespread concerns to the contrary. According a recently released study by researchers the National Bureau of Economic Research (NBER), the effects of foreclosure shocks on housing prices are much smaller than originally feared. Charles Calomiris, Stanley Longhofer, and William Miles authored ˇĄThe Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoilˇ¦ as NBER Working Paper No. 14294. The report authors note that, even under their most extreme scenario in which foreclosure rates would substantially exceed current forecasts, home prices - as measured between the second quarter of 2007 and the fourth quarter of 2009 - would likely decline less than 6 percent. The researchers maintain that the likely modest impact of foreclosure shocks on home prices is due to the fact that these shocks frequnetly occur late in the housing cycle - after housing starts have already declined when the supply of available existing homes has fallen sharply. These effects largely offset the price consequences of a supply surge caused by foreclosures. The authors emphasize, however, that the foreclosure impacts on home prices will vary across states, and they argue that headlines pointing to extreme circumstances in a few states can be misleading about the United States as a whole. Despite increased foreclosure rates throughout the country, only 12 states are projected to see foreclosure-induced price declines of greater than 6 percent, including the fastest growing states of Nevada, Florida, California, and Arizona. By using quarterly data for each state back to 1981, the authors created a model of the links between five variables: foreclosures, home prices, employment, permits issued for single-family homes, and existing home sales. Using state-level data makes it possible to measure the fluctuations that occur in state and regional housing markets. In contrast to the national market, individual states have seen larger and more volatile swings in foreclosures and house prices since the 1980s. Focusing their analysis at the state level allowed the researchers to account for the impact of variations in other variables, including employment change, which continues to be a critical regional differentiator affecting housing trends in the Rust Belt and the West. For more details on the analysis or a copy of the full report, visit:
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