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Subprime credit, idiosyncratic risk, and foreclosures

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  • Simlai, Prodosh

Abstract

In this paper, we look at the determinants of foreclosure rates with particular attention to measures such as household leverage, which is related to subprime credit population, and idiosyncratic risk, which utilizes a spatial delineation of housing submarkets. We use county-level data from the state of California and provide a number of important findings regarding the determinants of foreclosures across housing submarkets. We find a significant negative relationship between foreclosures and both housing price growth and idiosyncratic risk, and a positive relationship between foreclosures and household leverage. These relationships persist even after we control for state variables such as tech pulse, mortgage rate spread, median household income, and unemployment rate. We show a breakdown of the cross-sectional variability of foreclosure rates by allowing a two-way sorting of the counties using housing price growth and idiosyncratic risk. The idiosyncratic risk measure reemphasizes the translation of leverage-induced shocks into foreclosure rates.

Suggested Citation

  • Simlai, Prodosh, 2019. "Subprime credit, idiosyncratic risk, and foreclosures," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 175-189.
  • Handle: RePEc:eee:quaeco:v:74:y:2019:i:c:p:175-189
    DOI: 10.1016/j.qref.2019.01.015
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    More about this item

    Keywords

    Housing prices; Foreclosure rate; Idiosyncratic risk; Household leverage; Prediction;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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