Housing Affordability Spread and Foreclosure Rates

Over the past two decades, SMITH’s Research & Gradings has witnessed the boom and bust cycle of dot.com stocks, housing/real estate, and commodities.  Joe Kenny, SMITH’s Gradings Analyst, took a look at the data for housing as part of an ongoing critical self-examination process.   “After compiling census data on the median national home price and median household income we utilized regression analysis to characterize the relationship between these data points and the corresponding foreclosure rates,” Mr. Kenny said.  “Our analysis showed that between 1997 and 2010, the spread had very little impact in affecting foreclosure rates.”

However, as he further analyzed the years following the collapse of the housing bubble, he found a much stronger correlation between the Housing Affordability Spread and the rate of foreclosure. He explained,“Between the years 2006 and 2010 there was a negative correlation between the foreclosure rate and the spread. Thus as the spread decreased over the course of these years, the foreclosure rate increased from 0.99 to 4.60.”

Indeed. The jump in foreclosure rates is an outcome (lagging indicator) of the real estate market.  Mr. Kenny’s research has raised an important question about what is a leading indicator of a rebound in housing.

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