I was looking at the latest graphs from the Quarterly Household Debt and Credit Report. Looking at this one:
I realized that I had not looked into the effects of the 2005
Bankruptcy Reform Act (BAPCPA) on housing markets. Note that it came into effect right at the top of the housing boom.
And, it turns out, there are at least a couple of papers on this topic. One from Donald P. Morgan,
Benjamin Iverson, and
Matthew Botsch at the New York Fed, and one from Ulf von Lilienfeld-Toal and Dilip Mookherjee.
The effects of BAPCPA included making it more difficult for some households to use the homestead exemption in bankruptcy. So, before BAPCPA, households would consolidate their wealth in their home equity and seek relief on their unsecured debts. The passage of BAPCPA lowered some of the implicit value of homeownership, especially among highly leveraged or economically stressed households.
Both papers find significant correlations between home price movements before and after 2005 and the scale of the homestead exemption. Here is one chart on the difference between states, from the L-T & M paper. Home prices rose faster in 2004 and 2005 in states more affected by the law and then declined more sharply after the law was in force and mortgage defaults became more common in bankruptcies.
Among the states with high homeowner protections: Nevada, Arizona, and Florida (although some states that did not experience extreme price movements, like Texas and Oklahoma, also have strong protections).
It seems that this might have increased demand for homeownership in 2005, during the rush of bankruptcies and then decreased the demand for homeownership after 2005. Also, it has made it more likely for households to default on their mortgages, as opposed to their unsecured debts. Additionally, L-T & M find contagion effects in geographic areas with large numbers of bankruptcies.