New Woodstock Institute Research Illustrates Devastating Impact Foreclosures Have on Neighborhood Property Values
A new report by Woodstock Institute, There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values, shows that foreclosures have a significant negative effect on neighborhood property values. Although foreclosures have long been considered a problem associated with FHA loan programs, recent research has shown that the explosion in foreclosures that began in the 1990's was primarily driven by the growth of high-risk, conventional subprimelending.
Any debate about the costs and benefits of subprime lending needs to include consideration of the impact that failed subprime loans have not just on the individual homeowner or lender, but on the community as a whole,” says Geoff Smith, Project Director at Woodstock Institute and co-author of the report.
The report uses a unique database that combines data on the location of foreclosures with data on neighborhood and property characteristics for more than 9,600 single-family properties sold in the city of Chicago to measure that impact that nearby foreclosures have on property values. Even after controlling for more than 40 characteristics of propertiesand their respective neighborhoods, the study finds that foreclosures of conventional, single-family loans have a significant impact on nearby property values. The report’s key findings show:
1. Each foreclosure of a conventional mortgage within an eighth of a mile (essentially a city block) of a single-family home results a decline in property value between 0.9 and 1.136 percent. Less conservative estimates also show that each conventional foreclosure between an eighth and quarter of a mile leads to an additional 0.325 percent decline in single-family property values.
2. For the years examined, this indicates an estimated cumulative city-wide loss in property value due to conventional foreclosures between $598 million and $1.39 billion. For the 3,750 conventional foreclosures in Chicago during this period, this is an average of between $159,000 and $371,000 cumulative lost property value per foreclosure. These estimates include only the effects of foreclosures on single-family property values and do not include the effects on the values of condominiums, larger multifamily rental properties, and commercial buildings.
3. When isolating properties in low- and moderate-income neighborhoods, nearby foreclosures have an even larger negative effect on single-family property values. Estimates show property values declining by between 1.44 and 1.8 percent for each conventional foreclosure within one-eighth of a mile of a single-family property in a low- or moderate-income community. Given an average selling price of $111,002 for properties in low- and moderate-income census tracts, this amounts to an average loss of between $1,598 and $1,998 per foreclosure for every single-family property sold in a low- or moderate-income tract.
4. Policy makers need to consider the total costs of irresponsible subprime lending and the strong negative impact that these risky loans have on the economic, social, and emotional well being of neighborhoods and cities devastated by skyrocketing foreclosures,” says Smith.
Note from John Elwell: It is no surprise that when a home goes into foreclosure the neighboring properties also suffer. Though this study took place in Chicago, property values fall around the country for the very same reason. The former owner no longer cares about the home and has possibly even damaged it out of revenge prior to vacating. I have seen drains plugged and the water left running in several homes. The banks just see these homes as financial liabilities. Lending institutions make poor landlords. They are not set up to handle it. Who will mow the lawn, make repairs, keep the power on? Add to that the fact that a vacant house is a perfect target for vandalism, and you have an eyesore in the making. In a down market and with many banks holding out unreasonable hopes of recovering all of their investment, the home could linger on the market for months or longer! What will potential buyers think when they drive down your street and see these vacant and ill-maintained homes? Will they want to live next to such a property? So when you hear that foreclosures are increasing, keep in mind that you may feel their secondary effects by way of a lower value for your own home.
Source: Press Release from the Woodstock Institute
John Elwell - REALTOR
Bill Nye Realty, Inc.
Licensed in Florida