House Prices tied to Bankruptcy
October 9th, 2005For the second weekend in a row, I found an article in the New York Times about how the rapid rise of housing prices over the past five years is correlated to a decrease in bankruptcies. The basic idea underlying the phenomenon is that many homeowners have seen a vast increase in home equity in the past 5 years and have been able to avoid bankruptcy by borrowing money against their home equity.
What I found most interesting about the article was a map in the article that showed how the number of bankruptcies have either increased or decreased across the country. The hardest hit areas are traditional manufacturing segments of the country. One of the largest contiguous areas of the country where the number of bankruptcies have increased by 35% or more starts in the middle of Pennsylvania, continues through almost all of Ohio, and stretches into Michigan. The blue areas will not stay blue indefinitely; as housing prices stabilize and interest rates rise, equity will fall and mortgage payments for adjustable rate mortgages will rise. Just about everyone expects this to happen to some degree in the near future.
