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Insolvency Epidemic

Posted By Barry Ritholtz On October 10, 2005 @ 5:07 am In Economy,Real Estate | Comments Disabled

The Sunday NYT observes the inverse correlation between hot real estate markets and bankruptcy filings.

"A NEW bankruptcy law takes effect this month in the midst of an insolvency epidemic: personal bankruptcies have been rising steadily since 2000, and will most likely reach an all-time high this year. The law, which will make it harder for many people to clear away credit card debt, takes effect on Oct. 17 and has touched off a rush to the courts. In the bankruptcy court for the northern district of Texas, for example, filings for September were 46 percent greater than in September 2004.

Yet the rise in bankruptcies since 2000 has been far from uniform around the country. While there have been large increases in much of the South and Midwest, sections of the East and West Coast have had declines in filings over the last five years. To some extent, the increases in the South and Midwest reflect job losses from manufacturing and agriculture.

Economists say that as housing markets begin to cool, bankruptcies are likely to increase. "At some point you will get a combination of falling values combined with rising payments on adjustable mortgages, which will result in more bankruptcy," said Mark Zandi of the research firm Economy.com. "For these areas of the country that are enjoying such wonderful conditions right now, it will become much less wonderful a few years down the road."

It certainly makes sense that a strong real estate market — along with dropping interest rates — allows equity extraction via cash out refinancings. That may be keeping even more people from filing for bankruptcy.

Of course, its a double edged-sword:  as rates tick up, and as prices begin to cool, this source of easy money goes away.

Now here’s something curious: The Map from the NYT shows the various increases in bankruptcy rates on a county by county basis. The results were not exactly what I would have suspected, given how various counties voted in the last Presidential election:

Changes in Bankruptcy Rates by County, 2000 to 2005
click for larger map

Nyt_bankrupt_map [1]

graphic courtesy of the NYT [2]

Is it just me, or are is the map above surprisingly similar to those red/blue maps [3] we saw so much of [4] right after the election? 

The really curious thing is that the Gore voters from 2000 are filing for less bankruptcies since 2000, while the Bush voters are filing for more. (Does that m,ake any sense to you?)

Here’s the 2000 county Presidential voting map:   

2000_vote_county_by_county_1 [5]

Looks surprisingly like the first one; I never would have guessed that.

See also the population density maps of the same (here [6] and here [7]) for more of the same.

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Source:

Where Home Prices Rise Steeply, Bankruptcies Fall [8]
FORD FESSENDEN
NYT, October 9, 2005
http://www.nytimes.com/2005/10/09/weekinreview/09fess.html   


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/10/insolvency-epidemic/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/nyt_bankrupt_map.gif

[2] NYT: http://www.nytimes.com/imagepages/2005/10/08/weekinreview/20051009_BANKRUPT_MAP.html

[3] red/blue maps: http://bigpicture.typepad.com/comments/2004/11/weve_gone_map_c_1.html

[4] so much of: http://bigpicture.typepad.com/comments/2004/11/weve_gone_map_c.html

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/2000_vote_county_by_county_1.jpg

[6] here: http://bigpicture.typepad.com/writing/2004/11/population_dens.html

[7] here: http://bigpicture.typepad.com/writing/2004/11/2004_us_preside.html

[8] Where Home Prices Rise Steeply, Bankruptcies Fall: http://www.nytimes.com/2005/10/09/weekinreview/09fess.html?ex=1286510400&en=c6df118d3a14333f&ei=5090&partner=rssuserland&emc=rss

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