Clearing Up Some Housing Uncertainty

There is risk, and then there is uncertainty. The distinction was first made by Frank Knight in his popular work Risk, Uncertainty, and Profit. Risk exists when a probability can be attached and an expected value can be derived. Uncertainty exists when there is no objective way to place a probability on an event and so an approximate outcome can not be made. The word 'uncertainty' seems to characterize the state of the housing market today. The predictions for how bad it will end up being seem to be all over the charts because no one is quite sure about the extent of the problem.

Well today, the New York Fed posted up a new dynamic mapping and data tool which gives some valuable information towards clearing the uncertainty. The site provides many statistics on sub-prime and Alt-A mortgages, including:

• Loans per 1,000 housing units
• Loans in foreclosure per 1,000 housing units
• Loans real estate owned (REO) per 1,000 housing units
• Share of loans that are adjustable rate mortgages (ARMs)
• Share of loans for which payments are current
• Share of loans that are 90-plus days delinquent
• Share of loans in foreclosure
• Median combined loan-to-value ratio (LTV) at origination
• Share of loans with low credit score (FICO) and high LTV at origination
• Share of loans with low- or no documentation
• Share of ARMs with initial reset in the next 12 months
• Share of loans with a late payment in the past 12 months

The one I found most interesting though is the first one: "Loans per 1,000 housing units". If I'm understanding this correctly, this gives us the percentage of homes in a market which are backed by subprime or Alt-A mortgages. So let's take a look at two states which are supposed to be the worst housing market offenders: Florida and California.

Florida
Subprime loans per 1000 units: 39.40
Alt-A loans per 1000 units: 20.40
Total = 5.98%

California
Subprime loans per 1000 units: 38.60
Alt-A loans per 1000 units: 48.60
Total = 8.72%

These numbers are far from great; they also do not include many poorly underwritten home equity loans. Still, the risk of housing causing a doomsday type scenario seems pretty small to me if the share of houses with shaky loans is not even in the double digits. Some new problem will have to step up if the doomsayers are going to be proved right.