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Dunne, Timothy; Guhan Venkatu,. "Foreclosure metrics." Economic Commentary (Cleveland). Federal Reserve Bank of Cleveland. 2009. HighBeam Research. 20 Apr. 2018 <https://www.highbeam.com>.
Dunne, Timothy; Guhan Venkatu,. "Foreclosure metrics." Economic Commentary (Cleveland). 2009. HighBeam Research. (April 20, 2018). https://www.highbeam.com/doc/1G1-206404306.html
Dunne, Timothy; Guhan Venkatu,. "Foreclosure metrics." Economic Commentary (Cleveland). Federal Reserve Bank of Cleveland. 2009. Retrieved April 20, 2018 from HighBeam Research: https://www.highbeam.com/doc/1G1-206404306.html
Much has been written about the severity of the foreclosure crisis in Cleveland. Many observers cite weak economic conditions and above-average subprime-mortgage issuance as central factors in Cleveland's high rate of foreclosures.
While these factors undoubtedly play a role in driving foreclosure rates higher, another variable is often overlooked, namely, the length of time properties typically remain in foreclosure. Properties in the Cleveland area remain in foreclosure considerably longer than those in other large metropolitan areas in Ohio, and this raises Cleveland's overall foreclosure rate substantially.
This longer time in foreclosure has economic consequences, as well. Properties that remain in foreclosure a long time are likely to face substantial depreciation and bring down the value of neighboring properties. Moreover, a drawn-out foreclosure process may raise the cost of loans in an area by increasing the cost of foreclosure to lenders.
In this Commentary, we explain how the foreclosure rate captures two distinct features of the foreclosure process--the flow of new foreclosures and the length of time it takes foreclosures to transit out of the foreclosure process. When making comparisons across areas, either of these factors could be behind the differences we observe in the respective foreclosure rates. We show how this matters by comparing foreclosures from 2005 to 2008 in the Cleveland, Cincinnati, and Columbus metropolitan areas.
Measuring Foreclosures
A number of foreclosure statistics are reported by private firms and associations in the United States. One measure used to gauge the magnitude of foreclosure activity is the foreclosure rate. It tells us the fraction of all outstanding loans that are in the foreclosure process at a given point in time.
From an accounting point of view, the foreclosure rate changes over time for two reasons: The rate at which properties enter the foreclosure process changes or the rate at which properties exit the foreclosure process changes. We refer to the rate of flow into the foreclosure process as the foreclosure start rate, and the rate of flow out of foreclosure as the foreclosure transition rate. These concepts are similar in spirit to the ones used by labor economists when analyzing unemployment. Labor economists are interested in knowing both the number of people entering and exiting unemployment over some period of time--the flow--and the number of people unemployed at a point in time--the stock. …
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