Geographic Distribution of House Price Risk

Yesterday, we looked at a heatmap of Foreclosures; This turned out to be rather timely, as indicated by a front page article in today’s WSJ, In Home-Lending Push, Banks Misjudged Risk:

"In a surprise announcement late yesterday, HSBC said its
subprime-mortgage problem was worse than previously indicated. It said
the capital it sets aside to cover all bad debts, including the soured
mortgages, would be 20%, or $1.76 billion, higher than analysts’
consensus estimates. "The impact of slowing house price growth is being
reflected in accelerated delinquency trends across the U.S. subprime
mortgage market, particularly in the more recent loans," the bank said."

You can see the HSBC docs here. It turns out that "The percentage of HSBC mortgages more than 60 days past due is climbing. Fraud by borrowers has been higher than expected."

Since its doubtful that HSBC is the only bank that will be increasing its reserves to deal with accelerating foreclosures, let’s consider the parts of the country with the highest concentrations of at risk home prices. Fortunately, PMI has already done the heavy lifting for us: They created a map that depicts the geographic distribution of house price risk for all 50 U.S. states and DC.

Now for your homework assignment: Review the maps below, and consider what lenders and homebuilders have the highest exposures to the weakest areas. I’ll start: Toll Brothers has a high concentration in the mid-Atlantic states.   


Geographic Distribution of House Price Risk
chart courtesy of PMI

The  color codes rank order the 10 riskiest states in red (11 including
the District of Columbia), followed by the next 10 riskiest states in
tan, white, light blue, and aqua.

The Northeastern states and California top the list, but Florida replaced New York in the top 10, a change from the prior year.

For comparison’s sake, the following map shows the gains in home prices by region.

Home Price Appreciation

Data source: Census Division, % change over previous four Qs (as of Q3 ’06)


There are some who claim this data is irrelevant to the stock market; quite frankly, I simply do not understand that thought process (or the lack thereof).

UPDATE February 8, 2007 9:36am

Its a WSJ two-fer: Mortgage Refinancing Gets Tougher 

"With rates on many homeowners’ adjustable-rate
mortgages rising, some who would like to refinance into a new loan are
finding they can’t.

In some cases, that is because their loan carries a
prepayment penalty, which would force them to come up with thousands of
dollars if they refinance in the first few years. Such penalties are
common with so-called option adjustable-rate mortgages, which typically
carry a low teaser rate that rises sharply after an introductory period.

Other borrowers are getting caught short by a changing
housing market — one in which home prices have flattened and lenders
are beginning to tighten their standards after a long period of making
mortgages easier and easier to get. The challenges are greatest for
homeowners whose credit has declined since they took out their last
loan and for those who have little if any equity. Some of these
borrowers are still able to refinance but are finding it more costly
than they expected.

These new challenges come at a time when many borrowers who took out
adjustable-rate mortgages are facing higher payments. There are about
$1.1 trillion to $1.5 trillion in ARMs that will face rate increases
this year, according to the Mortgage Bankers Association. The MBA
expects borrowers to refinance as much as $700 billion of those

We are far from done with the economic and market impact of Housing . . .




In Home-Lending Push, Banks Misjudged Risk
HSBC Borrowers Fall Behind on Payments;
Hiring More Collectors
WSJ,  February 8, 2007; Page A1

Early Payment Default

PMI releases Winter 2007 Economic and Real Estate Trends report (pdf)
Economic and Real Estate Trends Report
The PMI Group,Winter 2007

PMI’s Winter 2007 Risk Index Reflects Slowing Housing Market

Mortgage Refinancing Gets Tougher 
As Adjustable Loans Reset at Higher Rates, Homeowners Find Themselves Stuck Due to Prepayment Penalties, Tighter Credit
WSJ, February 8, 2007; Page D1   

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What's been said:

Discussions found on the web:
  1. Leisa commented on Feb 8

    We are only now seeing the homebuilders write down their assets because they were “surprised” by the business conditions in the builder market. It was a surprise to me to hear folks calling for a bottom PRIOR to having any of these writedowns, and I believe that there will be more to come for the homebuilders.

    Bank loan loss ratios are at historic lows. Even 50% increases in the percentage still has that metric at historic lows. Take a visit to FRED to see for yourself this trend.

    There will be no bottom in the housing/credit markets until we see alot more balance sheet pain for the homebuilders and the “regular” lenders who have subprime stuff lurking in their portfolios. Calculated risk has done a good job of bird-dogging this story.

  2. Ohioan commented on Feb 8

    If the chart defines the risk based on the past appreciation rate, it is misleading. A flat housing market while the fundamentals are deteriorating could be overpriced. Take Northeast Ohio as an example. It is losing population, new home sites are everywhere, existing homes for sale remain on the market a long time (1+ years) unless the owner accepts a price well below the appraised value, and foreclosures are up. I would not call it a low risk state.

  3. seminole83 commented on Feb 8

    Subprime lender NEW is also blowing up this morning.

  4. j d ess commented on Feb 8

    Fraud by borrowers has been higher than expected.

    i love it. not, “we didn’t scrutinize carefully enough”. not “we were too aggressive”. not “we pursued a short-term profits without enough regard to long-term risk”.

  5. wally commented on Feb 8

    The coasts – can’t trust ’em.

  6. Michael C. commented on Feb 8

    New blow-up comes right on the tail of HSBC. Suprisingly, the HK market was able to come back almost 400 points overnight.

    HSBC Holdings Plc, Europe’s biggest bank, said it plans to set aside $10.6 billion companywide for bad debts, 20 percent more than the $8.8 billion it said analysts expected on average, because of struggles in its HSBC Finance Corp. lending business.

  7. scorpio commented on Feb 8

    barry, you’re so Old School. just the thought that declining housing and auto production have any relation to the real economy… or that the market itself has any relation to real events… you’re so funny. as i’m sure u know, inflation was made illegal some time ago, and recession is unimaginable.

  8. Ken M. commented on Feb 8

    For the Homework Assignment:

    Out West, it’s probably KB Home. Also, this showed up on “Global Econ Trend Analysis” a while back, and it may be worth repeating here again:

    The Mortgage Lender Implode-O-Meter —

  9. Nova Law commented on Feb 8

    From first glance there seems to be a correlation between home-price increase and states with population growth.

    Low density states with stagnant or falling populations – North Dakota, Indiana, Nebraska, and Kansas for example – have seen less housing price growth.

    High growth areas and/or areas with strong economies – Florida, Nevada, California, Maryland for example – are in red.

  10. Bob A commented on Feb 8

    Well the good news is… once those people walk away from paying twice as much in mortgage payments as they could be paying to rent the same house, they’ll have a little extra cash to spend at Wallmart, or on cars or everything else. And the banks will still be happy to help them out with as many 18%-32% credit cards as they can handle.

  11. Teddy commented on Feb 8

    Debt is good………….for you.

  12. HVH commented on Feb 8

    No no, it’s not DEBT — that’s such a puritanical word! It’s CREDIT that’s good for you. And everyone has a right to credit.

  13. MAS (San Diego) commented on Feb 8

    Bob A — Excellent point. Time to buy WMT!

  14. Idaho_Spud commented on Feb 8

    “Fraud by borrowers has been higher than expected.”

    These are people that you and I know better than to lend twenty bucks to, and yet the mortgage industry lent them millions.

    Cry me a river.

  15. Bob A commented on Feb 8

    The people now saying ‘Fraud by borrowers’ are the very same people that a couple of years ago were telling borrowers:

    “Don’t bother reading those (10 pages of discloser) documents, just sign down here”

    and to self employed borrowers

    “All we have to do is say you make enough to qualify, they’ll never even check”

  16. Mike commented on Feb 8

    I’ll toss in a hypothesis just to stir the pot :)

    One could make the argument that the low risk areas are mainly the “well grounded” folk. You know, the honest, hard working, well-grounded (in faith in a higher being) people of farm country or the bible belt.
    There appears to be less risk that these people will welch on the mortgage while the “less well grounded” people in CA(!) and the “sinners” in NV and FL are more interested in what’s best for them.

    Just an observation! :)

  17. lurker commented on Feb 8

    Hey Spud, guess who’s tax dollars will be spent on the bailout, if needed…???

  18. vegaman commented on Feb 8

    Just a side issue. Has anyone noticed that the the Wilshire 5000 is only 70pts (i.e 0.5%) away from its all time high from March 2000. Which begs the question where is the bear market (apart from Nasdaq stocks)? So the real and consistent source of a drag on returns is inflation and dollar depreciation. As a well diversified investor would be about flat in notional terms on any purchase made between March 2000 and NOW!!

  19. DavidB commented on Feb 8

    Aren’t these flippin’ banksters supposed to be the SMART money? What is this world coming to when a joe average like me can see something as plain as day and million dollar CEO’s can’t?!

    I think they need to start hiring these CEO clowns based on their ability to think objectively and independently and not on their ability to do exactly what their old college buddy down the street is doing.

    ….but then again, when you know in the back of your mind that the Fed will be there with it’s printing press to bail you out if you foul up there is every incentive to take risk and do no due diligence. The guy who will lose his job is the guy who doesn’t increase his loan portfolio 20% for the quarter, NOT the guy who did while pushing the balance sheet into a potential disaster “if the market turns”

    Time to buy credit counselors. These guys will be making a fortune soon.

  20. S commented on Feb 8

    Goldman is listed as nearly an 8% equity owner of NEW and almost 3% equity owner of NFI. I assume those investments were made in part to ensure they got a steady flow of mortgage loans that they could package and market to institutional investors.

    If Goldman did create a bunch of mortgage loan structured product from pools of mortgages fed to it by NEW (and I don’t know they did, I’m just hypoethesizing), would Goldman be on the hook for failing to perform proper underwriter due diligence if the borrowers did engage in widespread fraud?

  21. anon commented on Feb 8

    When you have lots of liquidity, every other assets in the market got jacked up beyond their fundamentals. The stock market in the late 90’s is now followed by the housing market. The bond market too has been operating with near zero term risk. This is part of entrepreneurial’s ‘dark matter’ that some harvard economists have talked about. We leverage cheap money in the form of global saving glut into more productive returns in the form of bubble economy.

  22. CDizzle commented on Feb 8


    Objective, intelligent, “can-do” folks have a hard time getting to the top when their direct, honest, fact-based approach intimidates the Kool-Aid-drinking establishment. Original, innovative employees stand out amongst the herd…and the herd’s insecurities fuel the ouster of said positive employee.

    It’s amazing how executives really don’t focus on the “Big Picture” of their respective companies. They are very much pre-occupied with paying for their grandchildren’s stay in rehab in 2015.

    As a former (stated humbly) innovative, idealistic employee, I’ve learned that I must conform…at least long enough to save enough capital to do what I want to do.

    At least that’s how the “super-regional” banking paradigm operates in this “flippin’ bankster’s” humble opinion…

  23. Lord commented on Feb 8

    I agree that the PMI analysis is not only of limited usefulness, lumping by states, but limited quality, since it really only looks at price and appreciation. In some locales, ones with a lot of building, this is relevant, in metropolises, it usually is not. I prefer your heat map.

  24. HVH commented on Feb 8

    DavidB: The guy who will lose his job is the guy who doesn’t increase his loan portfolio 20% for the quarter, NOT the guy who did while pushing the balance sheet into a potential disaster “if the market turns”

    Right! That’s exactly what happened. The traditional bankers were pushed out by the salesmen…

  25. Michael C. commented on Feb 8

    This market is like teflon wrapped in titanim inside an alloy of 2% beryllium and 98% nickel.

    Will nothing stop this beast of a market? Everything rolls right off and has little to no penetration.

  26. Nikki commented on Feb 8

    NoVa Law–

    MD actually lost population from net outmigration from 2004, 2005 and into 2006, all the while house prices skyrocketed.

    “Maryland experienced population losses from net internal migration (i.e. the
    sum of the net movement to and from other states) in 2006 for the third
    consecutive year after four successive years of gains. The 25,610 net loss was
    more than double the 11,680 net outflow in 2004/2005 and was by far the
    highest of the decade.”

    Link here (pdf)

  27. Nikki commented on Feb 8

    Talk about a disconnect from fundamentals, more people moving out of the state than into it, houses being built like there’s no tomorrow, and prices double in that time. No, no bubble here, please move along.

  28. Nova Law commented on Feb 8

    Nikki, thanks for correcting that. The economy in the state is healthy, and the real estate market in Maryland truly was on fire, especially in the DC suburbs, home to three of the wealthiest counties in the country (no doubt thanks to government largesse). That probably has a lot to do with the fact that Maryland is so red on the map (if not in the polling booth).

  29. DavidB commented on Feb 8

    Objective, intelligent, “can-do” folks have a hard time getting to the top when their direct, honest, fact-based approach intimidates the Kool-Aid-drinking establishment. Original, innovative employees stand out amongst the herd…and the herd’s insecurities fuel the ouster of said positive employee.

    It’s the classic stick your head up above the crowd…..and lose it.


  30. samuel commented on Feb 8

    “Just a side issue. Has anyone noticed that the the Wilshire 5000 is only 70pts (i.e 0.5%) away from its all time high from March 2000. Which begs the question where is the bear market (apart from Nasdaq stocks)? ”

    And margin debt has exceeded the March 2000 highs, and total credit market debt in the US is much higher now than in 2000. Looking at asset prices alone isn’t helpful if one also doesn’t look at the massive increase in debt which support the incredible asset price inflation of the last decade. We’ll see what happens when the ponzi finance merrygoround ends and the high tide recedes. HSBC may be just a first indication of how many of these guys are wearing no clothes.

  31. GRL commented on Feb 8

    the Worldwide Household International Revolving Lending System, or Whirl — . . .

    Ha HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa HaHa

  32. wakky commented on Feb 9

    The colors should be reversed: switch the Red and Blue.

  33. Tim commented on Feb 9

    What I think we see with HSBC is “Adverse Lender Selection”; with the number of correspondent lenders who supplied them going BK; It appears that the riskest, poorly documented loans went to the buyer with the poorest processing or most lax underwriting criteria. I am not sure condemning the whole subprime group make sense, Also these last two “HSBC and New Century” seem to be months behind others in reporting the problems with 2005 underwriting.

  34. John commented on Feb 12

    Oh, isn’t this the NEW economy – old things such as making house payments until you own the home and watching the budget are just so passe. Don’t you know that inflation doesn’t exist and only massively leveraged consumers can enjoy life? So big CEOs now see what Joe Normal could see all along – that reducing interset rates to ridiculaous lows to encourage rampant consumerism will only hurt the little guy in the end? Hey, don’t tell me that the banks were negligent by letting people working at Wal-Mart buy McMansions by offering them Loan-Sharking mortgage deals? You don’t say!

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