Update on Foreclosures Moving Up-Market

Back in 2009, we took a closer look at how foreclosures are distributed among the different price tiers. Do foreclosures occur only among the bottom tier, meaning among homes whose value puts them in the bottom third of the housing market in their respective metro? No, we found that, at the time, foreclosures were actually getting more prominent in the mid- to high-end segments of the market. More on that analysis can be found here.

We recently updated this data through June 2012. While the prior finding still holds true – compared to 2006, the share of foreclosures occurring among the middle and top tiers has increased – the increase in share has stabilized once again, as can be seen in the updated graph below. Currently the bottom tier accounts for 47.6 percent of foreclosures, the middle tier accounts for 30.5 percent and the top tier accounts for 21.9 percent. This compares to the bottom tier accounting for 59.1 percent of foreclosures, while the middle and top tier accounted for 26.5 percent and 14.4 percent, respectively, in November 2005, which is the peak in the bottom tier share of foreclosures.

Methodology
nLooking 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 (~100 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.