Google Search Queries, Foreclosures, and House Prices

Damian S Damianov,Cheng Yan,Xiangdong Wang

doi:10.1007/s11146-020-09789-y

Damian S Damianov, Cheng Yan + Show 1 more

Open Access

https://doi.org/10.1007/s11146-020-09789-y

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Abstract

We study whether Google search behavior for “mortgage assistance” and “foreclosure help” aggregated in the mortgage default risk indicator (MDRI) of Chauvet et al. (2016) helps predict future house prices and foreclosures in local residential markets. Using a long-run equilibrium model, we disaggregate house prices into their fundamental and bubble components, and we find that MDRI dampens both components of house prices. This negative relationship is robust to various model specifications and time horizons. A higher intensity of search online, however, is associated with lower future foreclosure rates. We also find that foreclosure rates increase after a decline in the fundamental component of home values, but are not sensitive to their transitory (bubble) component. Foreclosure rates are higher in metropolitan areas located in non-recourse states. We interpret these findings as evidence for strategic household behavior. Our paper sheds new light on the predictive power of household sentiment derived from Google searches on prices and foreclosure rates in local housing markets.

Highlights

The subprime mortgage crisis serves as a powerful reminder of the seismic impact that the financial behavior of homeowners can exert on the U.S financial system and economy
We further explore how foreclosures respond to house price declines of more than 5% in the previous year and find that the foreclosures increase more in the Metropolitan Statistical Areas (MSAs) sustaining such declines
Chauvet et al (2016) constructed a mortgage default risk index from data on Google search volumes for keywords such as “mortgage help” and “foreclosures assistance” and demonstrated that this index has predictive power for the returns on housing and mortgage-related assets. We analyze how this mortgage default risk index is related to house prices and foreclosure rates in local housing markets

Summary

Introduction

The subprime mortgage crisis serves as a powerful reminder of the seismic impact that the financial behavior of homeowners can exert on the U.S financial system and economy. In the post-crisis period, there has been substantial interest in the development of mortgage default risk indicators which can serve as a “warning signal” for ensuing future turmoil in housing and mortgage markets. The construction of such forwardlooking sentiment indices from household survey data (such as the consumer sentiment survey of the University of Michigan) has proven elusive. Household surveys are constrained with respect to geographical coverage and number of participants Their reliability is further complicated by the reluctance of respondents to truthfully answer sensitive questions related to their financial affairs (Singer and Ye 2013), and they are of limited use as a predictive tool in the context of housing and mortgage markets

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