The Long and Short of Housing: The Home Ownership Boom and the Subprime Foreclosure Bust

Abstract:     
The increasing risks that subprime lenders have been willing to take have culminated in a debacle of rising foreclosures. So far, however, subprime defaults and foreclosures are lower than they were about five years ago, and the problem is likely to be confined to the subprime market, rather than the conventional mortgage market or the US economy. Extensive public and private efforts are being made to mitigate the problem. In addition, despite popular consensus to the contrary, house prices in general have not fallen over the past year, and few markets are experiencing a substantial decline. Lenders and regulators are both taking action to reform subprime lending, and the foreclosure problem is likely to be limited to the 2004-2006 books of business. Meanwhile, there has been a long-term homeownership boom, extending broadly across American society and including minority groups with high immigration rates. This boom has been facilitated by the revolution in information technology, making it possible for lenders to measure risk more accurately, and by the growth of financial literacy initiatives and counseling. For these reasons, the subprime foreclosure problem is likely to be short-term. Looking at individual markets, many areas in Indiana, Michigan and Ohio are having serious problems, though there are some grounds for hope that they will not experience the worst of the subprime debacle.

Keywords: foreclosures, subprime lending, housing market, risk

Working Paper Series