What would a wall of foreclosures do to home prices?

If a flood of mortgage foreclosures hits because of the coronavirus and related shocks to the labor market and economy in general, what will happen to home prices, especially in the middle of a housing shortage?

It's complicated, but a working paper from the Federal Deposit Insurance Corp.'s Center for Financial

Research takes a stab at some answers. The study, although it looks at a time of housing surplus due to a failed subprime mortgage system, which contributed to the shortage — suggests that when foreclosures spike, home prices are not necessarily local, local, local for each specific location, location, location, to borrow the armchair axiom for assessing the desirability of real estate.

The preliminary study, out last November, is "What Happens in Vegas Doesn't Always Stay in Vegas: The Dynamics of House Prices and Foreclosure Rates Across Space and Time," by Hua Kiefer of the FDIC,

Leonard C. Kiefer with Freddie Mac, and Jie (Diana) Wei from the U.S. Treasury Department's Office of the Comptroller of the Currency — just a little light reading for this calm before the possible foreclosure storm.

As you might imagine, there's actually nothing light about it at all. My wee minor in economics did not prepare me to read the statistical formulas and understand the models, not even after 20 years of covering housing and commercial real estate with occasional forays into finance. Check it out here: https://tinyurl.com/ FDICVegas.

The study authors start with the housing boom and bust in Las Vegas amid the global financial crises of 2007-2008 — the Great Recession, when house prices in Nevada plummeted more than 25% year over year and foreclosure start rates rose more than 3 percentage points. Nevada was hardest hit.

They review the the nun precedented federal responses, which soon became as familiar to homeowners as Paycheck Protection Program is known now by employers and employees:

The Federal Reserve's "quantitative ea sing" by purchasing some $1.8 trillion of mortgage-backed securities and debt to help lower mortgage interest rates; the Housing and Economic Recovery Act, which helped stabilize the housing market with tax credits to first-time homebuyers, later to all homebuyers, and established the Neighborhood Stabilization Program, then the American Recovery and Reinvestment Act, both of which helped areas with high foreclosure rates and mortgage and property abandonment; and the Home Affordable Modification Program (HAMP), and Home Affordable Refinance Program (HARP), both administered by the Federal

Housing Finance Agency.

"These government programs were created based on the belief that subsidizing housing markets would help stabilize the U.S. housing market and that reducing foreclosures would help stabilize house prices. However, empirical evidence to date is limited with respect to the dynamic relationship between house prices and foreclosures," the authors write in the introduction. It is widely accepted in the literature that foreclosures influence house prices mostly through two channels: the disamenity (drawback) effect of foreclosed properties and the fire sale-induced supply effect. Few studies, however, focus on quantifying the aggregate effect of foreclosures on house prices in a macro setting."

So, they set out to do so, using data not just from Nevada but 48 states. Statistical devils are in the details, but:

"Shocks to the foreclosure rate in one state not

only affect house prices in that state but also the foreclosure rates and house prices in nearby states. When it comes to the housing market, what happens in Vegas doesn't always stay in Vegas. A one standard deviation foreclosure shock (from the average) leads to a 2 percent decline in real house prices over the long run (six or more years)."

They add: "Moreover, even at the state level, neighborhood effects are important. Shocks to the foreclosure rate in one state not only affect house prices in that state but also the foreclosure rates and house prices in nearby states. ... The fact that foreclosure rates have an economically meaningful impact on house prices at the state level could be useful information for policymakers evaluating the effectiveness of foreclosu remitigation programs.

"The literature has established that the spillover effects from

the foreclosure of any individual property die off after a short distance. However, the aggregate effect of multiple foreclosures in an area can affect not only local housing markets but can lead to ripple effects across space and time, magnifying the foreclosure rate's aggregate impact. Studies that omit these important effects — contemporaneous causality and spatial lags — are likely to underestimate that impact of foreclosure rates on house prices and thus understate the potential benefits of foreclosure mitigation activities."

Now, we wait. World War I was called the Great War until World War II. The Great Depression is still the Great Depression, and the Great Recession is still the Great Recession.

May there never be a Depression II or Recession II.