Insolvency Epidemic

The Sunday NYT observes the inverse correlation between hot real estate markets and bankruptcy filings.

"A NEW bankruptcy law takes effect this month in the midst of an insolvency epidemic: personal bankruptcies have been rising steadily since 2000, and will most likely reach an all-time high this year. The law, which will make it harder for many people to clear away credit card debt, takes effect on Oct. 17 and has touched off a rush to the courts. In the bankruptcy court for the northern district of Texas, for example, filings for September were 46 percent greater than in September 2004.

Yet the rise in bankruptcies since 2000 has been far from uniform around the country. While there have been large increases in much of the South and Midwest, sections of the East and West Coast have had declines in filings over the last five years. To some extent, the increases in the South and Midwest reflect job losses from manufacturing and agriculture.

Economists say that as housing markets begin to cool, bankruptcies are likely to increase. "At some point you will get a combination of falling values combined with rising payments on adjustable mortgages, which will result in more bankruptcy," said Mark Zandi of the research firm "For these areas of the country that are enjoying such wonderful conditions right now, it will become much less wonderful a few years down the road."

It certainly makes sense that a strong real estate market — along with dropping interest rates — allows equity extraction via cash out refinancings. That may be keeping even more people from filing for bankruptcy.

Of course, its a double edged-sword:  as rates tick up, and as prices begin to cool, this source of easy money goes away.

Now here’s something curious: The Map from the NYT shows the various increases in bankruptcy rates on a county by county basis. The results were not exactly what I would have suspected, given how various counties voted in the last Presidential election:

Changes in Bankruptcy Rates by County, 2000 to 2005
click for larger map


graphic courtesy of the NYT

Is it just me, or are is the map above surprisingly similar to those red/blue maps we saw so much of right after the election? 

The really curious thing is that the Gore voters from 2000 are filing for less bankruptcies since 2000, while the Bush voters are filing for more. (Does that m,ake any sense to you?)

Here’s the 2000 county Presidential voting map:   


Looks surprisingly like the first one; I never would have guessed that.

See also the population density maps of the same (here and here) for more of the same.



Where Home Prices Rise Steeply, Bankruptcies Fall
NYT, October 9, 2005   

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What's been said:

Discussions found on the web:
  1. Jos Theelen commented on Oct 10

    People in cities were more likely to vote Gore instead of Bush. People in cities are also more likely to go bankrupt. Doesn’t seem strange to me.

  2. Barry Ritholtz commented on Oct 10

    But the opposite is what is occurring
    look at the first map — the blue is bankruptcies DECREASING

    now does it seem strange to you?

  3. Francis Hwang commented on Oct 10

    But people don’t always vote for their economic self-interest, and they can be distracted from their economic self-interest by other issues, such as the Global War on Terror ™, or abortion, or getting God back in the classroom. More than a few political commentators–Thomas Frank comes to mind–have pointed out that as working class people face more economic and social insecurity, the right has been quite effective at turning that insecurity into cultural anger, and capitalizing on that anger in the ballot box.

  4. blue commented on Oct 10

    the only conclusion i can draw is that bush voters, as a group, are not able to see reality for what it is… what’s the matter with kansas, etc. they ‘believe’ in the underlying strength of the economy, bolstered by larry kudlow’s Right on America, Right on the Markets worldview. they are on the other side of the reality based community’s trades.

  5. Kirk Spencer commented on Oct 10

    A hypothesis – the reason bankruptcy rates are lower in those areas is because those also happen to be the hotter housing markets. That is, during the 2000-2005 time frame rates climbed enough in the ‘low rate areas’ that instead of bankruptcy a householder could pay off short-term credit obligations with an equity loan of some sort. If you can’t use your equity, you bite the bullet.

    I’ll propose a further test of the hypothesis (beyond matching refinance/other equity loan rates against the same bankruptcy map). If it’s true, then if/when housing sales slump (the bubble fizzles or pops) we’ll see a radical increase in the rate in those areas relative to the current high-bankruptcy areas.

  6. Jos Theelen commented on Oct 10

    Mmmm, made a mistake with my first message.

    Maybe more farmers are Bush-voters and more farmers are going bankrupt these days.

  7. Blackwood commented on Oct 10

    I still see a lot of white collar workers struggling with long term multi-year unemployment. In trying to cut their costs in 2002-2004 all the dot-com bust renters who had jumped in during 1999-2001 were just as quickly moving out of the expensive urban cores out to the hinterlands where there were still no jobs, but at least your money stretched farther. Meanwhile those with property in the overpriced urban cores have since 2003 have turned to home equity loans, with each new lower mortage rate offering them more and more loan money to drain down in yet another refinance. (while owners of cheaper real estate in non-urban cores obviously would have less.)

    The map is particuarly confusing because it’s not straight unemployment rates, it’s instead rates of change of unemployment filings between 2000 and 2005. I would like to see just the plain vanilla unemployment rates mapped as well.

    We can hazard a guess that more people in urban cores who bought real estate before the bubble are now in 2005 using the option of home equity loans first before they resort to the filing bankruptsy (which ironicly would have preserved that same home equity from creditors). Afterall all, it’s less paperwork hassle to file a home equity loan than to file for bankruptsy, and you don’t have to even pay a lawyer.

  8. Blackwood commented on Oct 10

    This is by court district for 2004, but again it shows the highest bankruptcy filing rates in areas with low real estate values (like around Memphis TN) and lower bankruptcy filing rates in areas that have home equity loans as an option first (like coastal CA and NYC)

  9. greyhair commented on Oct 10

    What a great catch Barry. Thanks so much.

  10. Chad K commented on Oct 10

    Being from Kansas… I take exception to anyone who believes a single word of the “What’s wrong with… ” book.

    One thing to note… Recent laws in Nevada, Cali, Texas, NJ and NY have made it considerably more dificult to file for bankrupcy.

    I’d put my money on almost all the changes coming via legislation rather than any other methods.

    Also, in my state (KS)… the one blue county went up… while several of the red went down… Nevada appears almost completely red, and is blue in the map… same with california, northern new jersey, mississippi, texas dakotas.

    The only thing of note on the map is that the dark blue areas of the north east appear to be doing better… and again, I would point to bankrupcy laws and home values before I’d point to anything else.

  11. Zach commented on Oct 10

    I think any time you have a phenomenon happening in the majority of the country its going to look like the presidential map. This doesn’t reflect anything other than the fact that if voting was by area the election wouldn’t have hinged on any swing states.

  12. critical thinker commented on Oct 10

    Bottom line, Kerry was a very dull, boring man, with very few ideas, no clear message, who failed to connect with voters, in spite of, apparently, a great deal of opportunity in traditional republican areas.

    (it is, to no surprise, that those on the coasts, even though the were better off, voted for Kerry)

    The democratic party failed overall because they ran on negativity and were hampered by needing to appease the radical left.

    So much for “all politics is local”

  13. Matt in Denver commented on Oct 10

    Without some analytical effort, you can’t just eyeball two maps of every county in the US and claim to see a relationship. I just don’t see it, or not in any way I think would be statistically significant. It’s a nifty map, but I think you’re guilty of pattern-seeking.

  14. Idaho_Spud commented on Oct 11

    Interesting point Barry. There are some striking similarities to the maps… As for politics vs economics though, I’m not sure it’s an apt comparison. In the 2004 prez election, people weren’t voting to keep themselves out of bankruptcy. I’ll add a couple of points to Mr. Hwang’s excellent post.

    The issues that the McMedia were churning out (if I recall correctly): Did GWB skip a tour of duty in the Air National Guard? Was JK really a war hero or a fake one? Who was the best person to lead the nation, post 9-11? Was JK flip-flopping on isssues for votes, or changing plans in the face of newer information?

    That said, it’s interesting that JK admitted that there was a need for a tax *increase* on the wealthiest people to pay down the alarming federal deficit. A majority of the wealthiest people live in in the blue areas, and clearly voted in what wasn’t *their* economic best interest, but instead their country’s best interest.

    Also interesting, GWB said at the time that we would continue to stay in Iraq. And yet many of the dead and wounded in Iraq come from rural America, but they clearly voted in what wasn’t *their* best interest, but their country’s.

    There is hope for this country. We all want what is best for it – we just have different ideas how to go about it. That’s what the democratic process facilitates – and where the McMedia have failed us so badly by failing to focus like a laser on the *real* issues.

    As the country’s only remaining political moderate :) I too find the similarities in the maps interesting. If one were to use the stereotypical red/blue voter paradigm, you could probably attribute the similiarities of both maps to the following: education, culture, religion.

    I also agree with Mr. Spencer’s thoughts. When the home-equity spending scheme collapses, we may see the coasts catch or surpass the plains in BK filings. I disagree with Jos Theelen’s theory that farmers are going bankrupt. I don’t see agribusiness in any more trouble than any other business, certainly less than automotive – although that might explain a lot of the upper midwest BK filings. Ford and GM are falling apart, as we all know.

    Lastly, I’d like to point out that cultural conservatism (voters) and economic conservatism (deficits) have completely parted ways, at least with regard to the current administration. No one can say with a straight face that the government is currently keeping spending in check.

    My gut says that many people felt offended (by Hollywood, the liberal media, by athiest elitist intellectuals) and that is what drove the election. Don’t underestimate the power of feeling deeply offended. Happily in the US, we exercise that emotion at the polls, rather than in more harmful ways – witness the behavior of the disaffected in the middle east.

  15. BT commented on Oct 11

    > “yet many of the dead and wounded in Iraq come from rural America, but they clearly voted in what wasn’t *their* best interest, but their country’s.”

    Sounds like a fool. But make sense, fools voted for Bush, mother of all fools. Bush maybe a fool for running this country to the ground, but he is no fool for making his loyal household rich while suckers hang themselves to dry.

  16. BT commented on Oct 11

    > “yet many of the dead and wounded in Iraq come from rural America, but they clearly voted in what wasn’t *their* best interest, but their country’s.”

    Sounds like a fool. But make sense, fools voted for Bush, mother of all fools. Bush maybe a fool for running this country to the ground, but he is no fool for making his loyal household rich while suckers hang themselves to dry.

  17. Marshall’s Ghost commented on Oct 11

    I think your seeing things. If the hypothesis is Blue on election map = blue on bankruptcy map I just don’t see it.

    The blue=blue relationship holds very well in NY, Mass and CT but outside of those states its a pretty bad model. It misses almost every county in Mich, Oh, Wisc, IA and IL. The blue=blue rule fails about 50% of the time in Cal and FL and fails more then 50% of the time in NV Ariz, WA, OR, ND, and SD.

    To my eye it looks like if you took counties at random knowledge about how the county voted would be of no help in predicting whether the county had a increase or decrease in Bankruptcies.

  18. Steve Smith commented on Oct 13

    An even stronger correlation exists between rising home values and partisan allegaince to Kerry in the last election. BTW, wouldn’t a better comparison be between increase/decrease in BK filings and the 2004 election, rather than the snapshot of the 2000 election you took?

  19. me (and TCO) commented on Oct 13

    I think the classic blue state areas tend to be ones of wealthy limosine libs and inner city poor. Neither of these tend to go bankrupt.

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