How can Regional Differences in the Risk‐of‐Foreclosure be Explained? Evidence from Swedish Single Family Housing Markets

Abstract

In Sweden, quite large differences in the risk‐of‐foreclosure for single‐family housing exist between regions. The aim of this paper is to explain such differences, using data on foreclosures for all Swedish regions. In an option‐based model, the risk‐of‐foreclosure is a function of such things as housing prices and incomes, as well as interest rate and housing price volatility. Instead of using housing prices and incomes to explain the risk of foreclosure, we use explaining variables in the labor market model. The main results indicate that the option‐based model explains the variation in foreclosure rates. Specifically, interest rate – together with price volatility, price changes, price and rent level, income, and employment – explains around one‐third of the total regional variation. Our extended option‐based model explains slightly more. Specialization within the industrial sector seems to have a positive effect on foreclosure risk in that it, together with the educational level of the workforce, reduces the risk. Specifically, mortgage lenders and banks can reduce their risk by concentrating their business on dense regions with a high degree of employment within the manufacturing industry and with a higher educational level of the workforce.