Recently, there’s been a fair bit of anecdotal discussion around the assertion that foreclosures, once a problem just for the sub-prime segment of mortgages, have been moving up-market. That is, people are suggesting that we’re seeing more foreclosures in the mid- to high-end segments of the market. We thought we’d crunch some numbers to see how much truth there is to this idea.

Turns out, there’s a lot of truth to it. In 2006, at the height of the real estate bubble, homes in the bottom one-third of home values made up almost 55% of all foreclosures. Homes in the middle one-third of home values made up almost 29% of foreclosures and homes in the top one-third represented just 16% of foreclosures. In the accompanying chart, you can see the dramatic changes in the distribution of home values among foreclosed homes. In July 2009, the bottom one-third made up 35% of foreclosures, compared to 35% and 30% for the middle and top one-thirds, respectively. Those are shocking numbers: Thirty percent of foreclosures are homes in the top tier of local home values. That means that top-tier homes make up almost twice the proportion of foreclosures as they did just three years ago.

Why? High delinquency rates in Prime, Alt-A and Option ARM mortgage products and declining cure rates (the rate at which borrowers resolve their delinquency status) are resulting in many more foreclosures among borrowers outside of the sub-prime mortgage market (and in higher priced segments of the market). Amherst Securities Group recently provided some data showing the higher delinquency rates for these products (see their Exhibit 6 below) and the strong relationship between increased negative equity and decreased probability of resolving delinquency status (see their Exhibit 9 below which shows, of borrowers who are 30 days delinquent, the percentage who become 60 days delinquent by their current loan-to-value ratios, where values greater than 100 indicate negative equity). As of the end of the second quarter of this year, Zillow estimated that 23% of single-family homes with mortgages are underwater on their mortgages, so expect cure rates to stay lower than they would be otherwise.

Looking at the distribution of foreclosures by home value can be significantly distorted by the variances in home values across the country. For example, it might appear that high-end homes as a percentage of all foreclosures is quite high nationally, but the reality is simply that areas with lots of foreclosures happen to be areas where home prices are higher. In order to better isolate the distribution of foreclosures by price segment without introducing the geographic variability of home prices, we have examined home prices while controlling for the local price level of all homes.

Specifically, from all homes in the Zillow database with valuations (~70 million), Zillow computed the ratio between the current house value and the current level of the Zillow Home Value Index for the county in which the home is located. We then computed the 33rd and 66th percentiles of this ratio and assigned all homes to three price tiers: bottom (homes where the ratio was less than the 33rd percentile), middle (homes where the ratio was between the 33rd and 66th percentiles) and top (homes where the ratio was greater than the 66th percentile). We then extracted all foreclosures since 2000 and computed, by month, the percentage of foreclosures in the month represented by homes in each price tier. This data is shown by month in the above graphic from Zillow.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).

About the Author

Stan is Zillow's Chief Economist. To learn more about Stan, click here.

  • DebtFree

    This was never exclusively a subprime problem, thought the media has incorrectly portrayed it that way.

    For most Americans, even if they earn $300,000 or more annually, they will spend it all (and more, with credit/debt).

    People generally have no savings, regardless of income levels.

    There was a NY Times article about 6 months ago about people living in multi-million dollar Park Ave townhouses in Manhattan. They spent it all on private school, food, vacations, etc. They were literally 30 to 60 days away from bankruptcy should they lose a job. They appeared “rich” but it was just a mirage.

    Why buy a $500,000 house when you can afford one at $1,000,000? People live right up to the limit, and are then surprised when an “unexpected” turn of events sends them to foreclosure.

    Expect the unexpected, expect recessions, expect job loss. Life isn’t perfect, so don’t plan your finances as if it was.

  • Josh Galvan

    I read on a Business Week article that there are 7 million homes yet to hit the market that have been foreclosed on.

    How do you think this relates?

  • abe vigoda

    1 out of 3 homeowners are under water. Banks are purposely keeping their REO’s off the market. There is a massive shadow inventory of vacant and foreclosed homes. The dollar is crashing, the REAL unemployment number is closed to 18% (U6), and employers are not hiring. In many areas winter will be approaching and the activity will slow down greatly.

    Although I am in a position where I could buy a home, I am quite content to rent at 1/2 the cost of owning. Prices will continue to fall well into 2010 and will not recover for several years.

  • John Fox

    This was covered in the Wall Street Journal today. Most of the government relief to date has focused on subprime and the chronically unemployed are driving this new mortgage crisis. How can we restructure mortgages for the unemployed in an economy that is creating zero jobs?

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  • http://microsoftXL Norene Rootare

    Have you ever made an offer to a lending institution on a forclosed real property? a CASH offer? Of course, you’re going to low-ball the offer, but to be denied completety is ridiculous. They would rather sit on it and hope for another deal than to take the immediate cash offer and be done with it.
    Leave your card with that decision maker and say “I can close any time.” You may or may not hear from them. AFTER 36 MONTHS,TAKE THE OFFER OFF THE TABLE.

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  • Charles Finley

    I’m surprised this is big news only today.

    Our financial adviser was talking about this more than two years ago.

    Here is the key section:

    “Subprime” is a label that is given to borrowers with low credit scores. A borrower who has a good credit history and a track record of paying the bills on time is not considered subprime.

    “High risk mortgages” are those that have features that increase the likelihood of the borrower being unable — or unwilling — to make the payments at some point in the future. The most notable of such features are the tendency for the loan’s monthly payment to reset substantially higher in the future, limited documentation of borrower income or assets, and very low down payments. Many high risk loans contain a combination of these vulnerabilities, if not all of them.

    Now, here is the essential point: many, many high-risk mortgages were granted to borrowers who were not subprime.

    As a matter of fact, high-risk mortgages have accounted for a comfortable majority of all San Diego home loans in recent years.

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  • Chartered Surveyors Plymouth

    Thanks again for amazing comments!!! I have just had the opportunity to write exactly this on another site! I agree that foreclosures have not been necessarily limited to one demographic, rather the most hardest hit has been the middle to higher end of the market as the growth that we may see from the lower end has not occurred and therefore families moving upwards in their real estate portfolio or home acquisitions have ceased! Furthermore those in a position to buy in the reducing market have most likely bought in areas or locations where the rental market will continue to grow after market recovery.

  • Hosting

    it’s almost 6 months ago, how it is now?

  • Stan Humphries

    @ Chartered: If there’s another post on this topic, feel free to include a link so we can all take a look.

    @ Hosting: Good question. We’ve been heads-down on several other projects but an update of the chart would be worthwhile. I’ll add it to our list.

    Thanks to all others for their insights posted here.

  • bird netting

    I think it’s almost 8 months ago, how it is now?no 6.

  • Home Foreclosures

    Home foreclosures are sure on the rise.

  • Indianapolis Real Estate

    I know this is kind of an old post, but it doesn’t seem like too much has changed. Foreclosures have hit every segment of the market. I see the light at the end of the tunnel in our area, but it seems other areas of the country still have a ways to go.

  • The BusinessIdea

    Its certainly a bumpy road right now.

  • Kathleen

    Indianapolis real estate and Indianapolis homes for sale offer a plethora of forclosures.

  • Sceptre Group Limited

    During July, one in every 397 households in the country had received a foreclosure filing. Making up Some 97,123 U.S. properties.

  • Alternative Energy

    U.S. foreclosures will peak in the second half of 2010 and home prices will continue to decline through the end of that year, according to Barclays Capital.

  • New Carbon fiber cloth

    highest number of foreclosures is hitting the real markets high-end goods in 2009 as the discount price continues to throw more and more properties under water. Is I have watch the simulation of the connection. I think that’s good enough to be installed in that building. Good luck, then.

  • Rodney @ home building guide

    I wonder if 1 out of 3 homeowners are still under water? Maybe in some areas of Florida. I heard today that the economy isn’t expected to turn around until 2012.

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