One of the signs you look for when an economy, and in particular a housing market is in distress is the number of foreclosures hitting the market. Foreclosures are a lagging indicator as typically households try to hold on as long as possible while lenders will typically offer borrowers a grace periods to try and catch up on outstanding payments. However, once foreclosures begin to increase they create somewhat of a self fulfilling feedback loop. When houses are forced to sell they create a clearance price which ultimately impacts the values of homes in the surrounding areas. In their book ‘House of Debt’ economists Atif Mian and Amir Sufi argue the impact of the housing bust in 2008 was ultimately magnified through the sharp increase in foreclosures. They believe the damage could have been mitigated had banks partaken in some of the risk sharing, by forcing lenders to share in the downside of property values they would have been more prudent in their lending standards. But alas, this was not the case, and as we can see in the chart below, US foreclosure starts (listings) and completions (sales) began ratcheting higher in 2005 as home values peaked. Foreclosure sales ultimately peaked towards the end of 2010, with home values bottoming in 2012.

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