Neat Federal Reserve study on negative equity and default decisions.

The study examined borrowers in Arizona, California, Florida and Nevada who bought homes in 2006 with no money down. Nearly 80% of those borrowers had defaulted by September 2009.

It was pretty clear in 2006 that the party was over. The number of home sales tanked, absolutely tanked, in the summer of 2005. But somehow home prices kept increasing until the summer of 2006. Oh wait… the banks were giving out zero-down loans to anyone with a pulse, no wonder home prices kept increasing! The stupidity of the U.S. banking industry is beyond human comprehension. 80% of those loans defaulted!

Arizona and Strategic Defaults

And the Federal Reserve study found that when home equity falls below 50 percent, half of the defaults are strategic defaults driven purely by negative equity, they had nothing to do with losing a job or other income shocks.

And strangely enough, Case-Shiller numbers show that Phoenix home prices have fallen 50% from the peak.

Via Calculated Risk.

What Happened to Dallas Real Estate?

And look at the numbers for Dallas, home prices fell 5% from the peak. Only 5%! What planet is Texas from?

My guess is that one reason for the lack of a boom in Dallas were Texas state laws and regulations put in place after the Texas housing boom and bust in the 1980s. I wonder what those measures were. If you have any ideas, let me know.

(I have a couple of ideas. One, property taxes in Texas are super high which discouraged investing / speculating on real estate. I’m not suggesting Arizona do that. More relevant to Arizona, Texas apparently has a law that when homeowners refinance they must end up with at least 10% equity. That law could prevent your neighbors from over-extending themselves, getting foreclosed on and lowering your property value. In addition, I believe Dallas had a little housing boom in the late 1990s when most markets didn’t.)

If you know of any other weird Texas real estate or housing laws that may have put a brake on the housing boom and bust in Texas, let me know.


That Fed study found homeowners are more likely to walk away in states with anti-deficiency laws like Arizona.

The median borrower in a state where lenders have recourse to borrowers’ assets, such as Florida or Nevada, defaults when he or she is 20 to 30 percentage points further underwater than the same borrower in a non-recourse state, such as Arizona or California.

Via Wall Street Journal.

ADDED: More on strategic defaulters from HousingWire.