Abstract
This paper addresses one of the key issues – the foreseeability of the housing market downturn that began in September of 2007 and intensified in the fourth quarter of 2007 – that must be addressed in assessing the extensive securities class action litigation that has been filed against financial institutions (and others) seeking to recover damages for investor losses arising out of the credit market crisis. We begin our analysis of this issue by first discussing the legal centrality of this issue to much of this litigation. We then turn to answer the question of when the housing market downturn became foreseeable by analyzing housing prices (regional and nationwide), housing sales, housing future contracts, and various market spreads such as the ABX triple A indexes. We conclude that these data are consistent with the view that the housing market downturn was in fact not foreseen by the market prior to the fourth quarter of 2007.
Highlights
It is undoubtedly the case that in many of the securities class action lawsuits that have been filed against financial institutions due to investors’ losses in the wake of the recent financial crisis plaintiffs will be able to point to statistically significant, substantial price drops associated with firm-specific disclosures of writedowns and losses associated with securities whose value has been negatively impacted, perhaps dramatically so, by the downturn in the real estate market.[1]
We show that standard explanatory variables that have historically accounted for a substantial portion of the variation in changes in housing sales would have “predicted” positive housing sales during the September – November, 2007 period consistent with the view that the housing market downturn was unanticipated
Given the importance of changes in housing sales as the primary means by which the housing market has historically cleared in times of economic stress, we examined the relationship between year-over-year percentage changes in monthly housing sales over the January, 1969 – December, 2005 time period and, as independent variables, year-over-year percentage changes in: the U.S unemployment rate, the production level of the purchasing managers’ index, the 10-year U.S Treasury rate and, whether the country was in recession.[25]
Summary
It is undoubtedly the case that in many of the securities class action lawsuits that have been filed against financial institutions due to investors’ losses in the wake of the recent financial crisis plaintiffs will be able to point to statistically significant, substantial price drops associated with firm-specific disclosures of writedowns and losses associated with securities whose value has been negatively impacted, perhaps dramatically so, by the downturn in the real estate market.[1]. The key unifying issue that must be addressed in answering these questions, and perhaps the most fundamental of all the issues raised in the current wave of securities class action litigation arising out of the financial crisis, is the extent to which the downturn in the housing market, and the resulting financial institutions’ writedowns and losses on securities with substantial real estate exposure, was foreseeable earlier in time It is this foreseeability issue that our paper will focus on, including a detailed discussion of why this issue is legally central and our own analysis of housing data and market spread data that speaks to the foreseeability of the housing market downturn. Many of the securities class action complaints explicitly make the claim that the housing market downturn clearly became foreseeable in the fourth quarter of 2006 and, at the very latest, in the first quarter of 2007
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
