The Common Thread in Recession-Proof Neighborhoods

It may seem obvious why some areas were hit harder than others when the housing bubble burst. Sure, many markets were more saturated with subprime mortgages — particularly those in the Sun Belt — but there’s another layer to this onion you may not have peeled back yet; the role of the Federal Housing Authority (FHA) loan.

More FHA Mortgages, Less Foreclosure

According to a new working paper from the Federal Reserve, data now suggests government-sponsored mortgage insurance programs mitigated the effects of— and stimulated the recovery from— the great recession. In counties with high FHA loan program participation ratios, there were lower unemployment rates, higher home sales, higher home prices, lower mortgage delinquency rates and less foreclosure activity then in counties with less participation. These figures were applicable soon after the 2009 peak of the financial crisis and also six years later.

Unemployment rates had increased 26% by the end of 2008 in counties that had low FHA loan participation, compared to a mere 4% increase in counties with high FHA participation. And a year later, unemployment rates had worsened by 106% and 58%, respectively. By the end of 2012, unemployment rates remained 30% higher in counties with low FHA loan participation.

These discrepancies boil down to a few different components, according to the Federal Reserve, including lower government liquidity premiums, lower government credit-risk premiums and looser government mortgage-underwriting standards. The combination of these components, the Fed theorizes, may yield higher private-sector economic activity after a financial crisis.

Is an FHA Loan Right for You?

FHA loans are famous in the homebuying community for their low down payment requirement, making them a good option for those who don’t have a ton of cash on hand. It’s important before you put in a house offer to determine how much down payment you can afford, and how much house you can afford. (You can use this home affordability calculator to crunch the numbers.)

When preparing to buy a home of your own, your credit score plays a major role in the interest rate you’ll pay and what your monthly payment will be. You can get your free credit scores, updated twice every month, at Credit.com.

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