Securities Litigation and the Housing Market Downturn

Atanu Saha and I have recently completed a paper analyzing the issue of (1) when the housing market downturn occurred (on a sustained, statistically significant basis); (2) when the market foresaw this housing market downturn; and (3) why the issue of the “foreseeability” of the housing market downturn is legally central to much of the securities litigation that has been filed by investors against financial institutions in the wake of the credit market crisis. The paper is forthcoming in the Journal of Corporation Law and was presented at ILEP’s Scottsdale, Arizona conference on securities litigation.

Based on our analysis of housing prices (regional and nationwide) as well as housing sales (the time series of which begins in January of 1969) we conclude that the housing market downturn began in September of 2007, despite common claims that it began in the 4Q of 2006 or 1Q of 2007. To address when the market foresaw the housing market downturn, we analyze, in addition to housing price and sales data, housing futures contract pricing data and various market spreads such as the ABA triple A indexes. We conclude that the housing market downturn was in fact not foreseen by the market prior to the fourth quarter of 2007.

As we explain in detail in our paper, the issue of when the housing market downturn was foreseen by the market is legally central to much of the securities litigation that has been filed because plaintiffs’ claims as to why there were disclosure deficiencies by financial institutions, scienter for those deficiencies and “loss causation” for damages as a result of those deficiencies typically hinge on the claim that the housing market downturn was foreseeable.

Our paper, which is entitled Securities Litigation and the Housing Market Downturn, can be downloaded here.