Subprime Mortgage Loan Delinquency and Price Appreciation
The Graph of the Week comes from the article "Subprime Credit: The Evolution of a Market" by John Silvia from the July 2008 issue of Business Economics. It shows the subprime delinquency rate plotted against the OFHEO year-over-year price appreciation. From the article
Expectations drive both supply and demand. During the past four years, what have expectations been and how did they evolve? The buyers expected home price appreciation— in some markets very big appreciation—and often expected their personal income to also rise over time to cover their future payments. In Figure 1, we can see that assumptions about higher home prices were validated up to mid-2006. The builder saw a healthy housing market and was willing to build many homes that were expected to sell at a profit in a very short time. The lender also anticipated a healthy mortgage market and expected there to be an activemarket for the ultimate holders of the mortgages.Moreover, up until the end of 2005, the delinquency experience on subprime mortgages was very favorable.
The article's abstract is here. NABE members can read the entire article online.