Secret #36 – Fallacy of Composition – Foreclosures
One Versus Many Higher-Foreclosure Mortgages
If one home buyer takes on a higher-foreclosure mortgage, it does not affect house prices.
But if enough home buyers in an area take on higher-foreclosure mortgages, it will eventually drive up house prices for everyone which completely offsets – for later home buyers – the initial advantage to the earlier home buyers of allowing higher-foreclosure mortgages.
And eventually, it will drive up foreclosures in the next downturn which can affect the value of all houses in a neighborhood, especially, if the neighborhood has a lot of higher-foreclosure mortgages.
For example, when a community housing non-profit helps lower-income home buyers get non-prime mortgages with a small program it doesn’t affect house prices. The numbers aren’t big enough and the nonprofit typically also provides individual counseling to help offset some of the higher risk of their higher-foreclosure mortgages.
But if a new higher-foreclosure mortgage program is used by a large enough percentage of home buyers in an area – such as FHA or the GSEs increasing their maximum debt-to-income ratio – then house prices will increase in the short and medium run after the change but foreclosures will be higher in the next downturn.
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