Subprime update


The chart above illustrates where the default rates on subprime mortgages are the highest. So far, the highest delinquency rates appear to be in upper midwest and Louisiana, areas hit by some economic turmoil. It is interesting to compare that chart to the one below, which shows the areas where subprime lending was the greatest in 2006:


We’re not quite sure what these data in the WSJ mean in their entirety, but it sems to us logical that real estate market problems may intensify significantly in those areas of the most intensive subprime lending in 2006 — the problem may not have rolled out completely to those areas yet. This line of thinking would imply that central and southern California, parts of Florida and particularly Miami, and places as diverse as Richmond, Memphis, and McAllen may be in for a particularly rough ride in the coming months.


This article from the St. Louis Fed on housing prices suggests that Florida and California might experience above-average distress in the coming months. Florida and California are among the biggest offenders in the ratio of housing prices to income — essentially, nobody in either state, or at last their highest priced areas, appears to be able to afford the homes they buy:


This can translate, in a post-bust environment, to a disproportionate decline in prices. Note the experience of Arizona below:


Historically, California was sometimes shielded from the steepest declines in prices because of migration into the state. Now California is losing population, so that protection is no longer available. We’ll see what appens over the coming months.

Leave a Reply