You may have missed a terrific chart Bill showed over the weekend at Calculated Risk: States: U-6 Unemployment Rate vs. Mortgage Delinquency Rate. Its a state by state look at the correlation between mortgage delinquency and U6 Under/Unemployment.
I would describe the correlation between the two as significant but not overwhelming. However, we must also recognize that there is a real world lag between the loss of income caused by a firing or a decrease in available hours, and any subsequent mortgage delinquencies. Perhaps a 4 or 6 quarter shift in the U6 data would show a tighter correlation.
The chart (below) goes a long way in challenging those who live on anecdotal tales of gainfully employed profligate spenders who are living the high life by not paying their mortgages. To the contrary, the data shows that the income loss associated with unemployment (and underemployment) is a significant factor in mortgage delinquency.
Additionally, note the two outliers in terms of delinquency: Florida and Nevada, with the former a recourse (but homestead) state and the latter a non recourse state.
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click for ginormous chart chart courtesy of CalculatedRisk >
If anyone wants to produce evidence of the contrary, I am willing to post an alternative explanation.
Anyone who sends me anecdotal tales, be forewarned I have a voodoo doctor who enjoys jabbing hot needles into the crotch region of the innumerate . . .
> Source: States: U-6 Unemployment Rate vs. Mortgage Delinquency Rate CalculatedRisk , May 23, 2010
http://www.calculatedriskblog.com/2010/05/states-u-6-unemployment-rate-vs.html
It seems clear from the chart that areas with a bigger bubble diverge above the trend line. That makes sense, since those are people more likely to have overpaid, and maybe more likely to have speculated prices would continue going up dramatically. CalculatedRisk puts Floridaâ??s outlier status to itâ??s severe foreclosure laws. Delinquencies arenâ??t foreclosures though. Ditto when they say negative equity significantly increases delinquencies. It would increase defaults, but has a fuzzier impact on delinquency.
Also, it isnâ??t clear if this trend line is weighted by population or not. California ought to have more weight than North Dakota, no?
What percentage of each stateâ??s citizens donâ??t know the difference between Uncertainty and Risk? http://rwer.wordpress.com/2010/05/22/stiglitz-implicitly-accepts-the-orthodox-view-that-2/
Maybe they should start over in Canada or Australia! http://rwer.wordpress.com/2010/05/21/why-deleveraging-hurts-so-much/
This correlation is even more compelling when you consider that some of the outliers such as Oregon had housing bubbles that lagged the rest of the country. Foreclosures there will catch up.
This chart is no surprise, you would expect mortgage deliquencies to rise with unemployment. You would expect a lot of â??bad thingsâ? when unemployment rises.
Separately, not charted, is that consumer spending has risen for 7+ months.
Questions- where is this money coming from in consumer spending? (this chart that money isnâ??t going into mortgage payments!) How does consumer spending in this recession/delinquency/unemployment, jibe with the turnaround in prior recessions? Are lenders reporting Jingle Mail statistics or hiding them?
So BR if I read this correctly, 4-6 quarters after losing a job or obtaining a job with a lower income level the delinquency rate rises?
That makes sense if you figure that many will try to make it by maxing out their credit cards and home equity lines (although typically HE lines were cancelled early on in this saga when values dropped).
I think the problem in FL was all of the spec and 2nd, 3rd and 4th home purchases (Cape Coral FL) that took place in the name of investing (greed). It created an entire cottage industry just by creating more new construction jobs for homes that were either never lived in or only occupied for a couple of weeks a year.
I donâ??t think that chart tells me if individuals are living â??the high lifeâ? after walking away from their additional home (2nd home) or not (my personal belief is that those individuals do have more money to spend and are spending it).
For those who are homesteaded that had cut back to make their mtg pmt, who no longer are making that mtg pmt but still living in the home, would they now have more money to spend on other things?
Perhaps. Live the high life? I doubt it. The local media (Ft. Myers & Naples) are reporting that some are living in their homes for up to 2 years without making a single mtg payment during that time.
We need more data���� maybe compare current visa/mastercard receipts of those who walked away with their prior spending history?
BR,
I saw in a presentation a table based on Amherst Securities data. The title of the slide was â??Being Underwater Is a Much Bigger Driver of Defaults Than Unemploymentâ? for Prime Loans. I canâ??t figure a way to post the table directly since itâ??s in a PDF doc, but hereâ??s a recreation:
Prime Loans â?? Monthly Transition Rates (%)
Unemployment Rate CLTV CLTV CLTV CLTV 3 Months Ago 120% 12% 0.18 0.51 0.97 2.05
The table uses transition rates as the punchline and I donâ??t have as good a grasp of the implication but maybe you do. At any rate, from my ignorant eyes it appears that if you look at say, a house with a CLTV of 101-120% (just underwater), as the unemployment rate from 3 month ago goes from below 8% to the highest rate of above 12%, the transition rate increases by about 50% (I guess that means about 50% more people are moving up the stages of delinquency). However, if you look at the lowest unemployment rate 3 months prior (the 8%) category, as you go up the CLTV chain from lowest to highest, the monthly transition rate increases almost 400%.
So that seems to be some evidence that the equity factor in the home may be more important than unemployment when it comes to delinquency, particularly for Prime Loans. I do not know if this applies to other categories, and I do not know how to put prime loans in the context of size compared to the entire mortgage market. But the whole point of this is to figure out if deliquency is driving some of the retail spending. If Prime Loans holders are simply stopping payment b/c of a loss of equity and not a job, this would seem to reinforce that idea.
Well shit â?? the table didnâ??t post right, let me try it again:
Prime Loan â?? Monthly Transition Rates (in %)
Unemployment Rate CLTV CLTV CLTV CLTV (3 months prior) 120% 12% .18 .51 .97 2.05
Again, I found it interesting but I really donâ??t know if this provides a meaningful counterpoint of data to your argument, BR. It should just seemed like important info to know that for Prime Loans, at least, defaults may be more sensitive to equity in the home and not employment.
Being underwater turns out to be a bigger driver of voluntary walkaways
Regardless, they (Unemployment/Underwater) are not mutually exclusive
Questionâ?¦
I get why Florida, with itâ??s extremely generous Homesteading provisions, makes it an interesting state for people that are at high risk of losing everything they have (legitimate or illegitimate startups, anaesthesologists (sic), etc etc.)
Why would the homesteading provisions drive up the non-payment rate though? it should still be theoretically the same process to evict someone there since the mortgage payers donâ??t own their mortgage no?
What piece of the outlier for florida is the homesteading provisions (under 9600 sq ft and its yours to sit in!), and what percentage was just the same factors that were driving arizona and Nevada (ie: climate, people overestimating the expected migration, low taxes driving prices of houses higher and higher), etc etc.
Ok â?? for some reason wordpress hates my table. Will try to post later.
How about the idea that high ownership drives high unemployment. If you are a renter and you lose your job youâ??re far more flexible to move where there is a job. Owning a home on the flipside makes people stay where they are.
I guess I have to do it this way unless someone can tell me how to do it better. Here goes.
Monthly Transition Rates (in %) for Prime Loans w/CLTV <=80% (i.e., lots of equity)
Unemployment Rate 3 months ago 12%: .18
Monthly Transition Rates (in %) for Prime Loans w/CLTV 81-100% (i.e., not underwater)
Unemployment Rate 3 months ago 12%: .51
Monthly Transition Rates (in %) for Prime Loans w/CLTV 101-120% (i.e., underwater)
Unemployment Rate 3 months ago 12%: .97
Monthly Transition Rates (in %) for Prime Loans w/CLTV >120% (i.e., deeply underwater)
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