Sorry!! The article you are trying to read is not available now.

How Does a Foreclosure In Your Neighborhood Affect Your Home's Value?

Print comment Post Comments
In a paper for the Federal Reserve Bank of Atlanta, the paper's co-authors found that the measurable impact of distressed homes on surrounding home values in neighborhoods was between 1 and 10 percent (about $5,000 on average), depending on regional factors.

Atlanta Fed visiting scholar Dr. Stephanie Rauterkus from University of Alabama at Birmingham, one of the paper's co-authors, discussed the paper on a podcast I ran across on the Atlanta Fed Website.

See the transcribed portion below:

Moderator: What is the relationship between subprime loans and foreclosure rates and, in turn, property values and which way they move?

Rauterkus: What we've seen is that the incidence of foreclosure has been higher with subprime loans. And that's not all that surprising because, again, these subprime borrowers have higher debt-to-income ratios; maybe the lenders were maybe not able to verify their income, and so they do present a greater risk. And so, with that greater risk, the likelihood of default and subsequent foreclosure is going to be higher. And so we do see higher foreclosure rates related to subprime loans, and so that's the connection there. When you add in predatory lending, the connection between these three is that, again, it's difficult to prove predatory lending. Oftentimes the most that we have is a suspicion of predatory lending or maybe some anecdotal information. But what we find is that borrowers who are subprime borrowers, or not eligible for prime loans, are more frequently the targets of predatory lending schemes than prime borrowers. And so that's why we tend to see these three terms hand in hand. Predatory lending leads to subprime lending, which often leads to high foreclosure.

Moderator: How can an individual's home loan affect their entire neighborhood?

Rauterkus: Well, there tends to be this ripple effect, and we start to refer to this as contagion, or foreclosure contagion. Because what happens is that if a particular mortgage in a neighborhood, or a home that's covered by a mortgage in a particular neighborhood, defaults and goes into foreclosure, what we've noticed (and maybe if there's just one home in the neighborhood the impact is not as great) but what we've noticed is that, over time, we've found that the impact of that home on the other homes in the neighborhood can be as much as a 10 percent decrease in the value of the surrounding homes. On average, the impact is about 1 to 2 percent. But because we found that there are significant regional differences—so the impact of a foreclosed home in a neighborhood in Atlanta, Ga., may be very different from the impact of a foreclosed home in a neighborhood in Kansas City, Mo.—and so that's why we see this wide range of 1 to 10 percent. So there are some studies that have even gone so far as to extrapolate across the entire housing stock in the country, and so they've thrown out numbers such as $5,000, you know. So your question is, "Well, what's the impact of a foreclosed home on the neighborhood?" And so some studies have said it's $5,000. If a home in your neighborhood goes into foreclosure, that one home is going to drop the value of your home by $5,000—which means if ten homes in your neighborhood go into foreclosure, that's a $50,000 decrease in the value of your home.

Wow, did she say $50,000?

For the next two days participants in the Fed summit on neighborhood stabilization will be kicking around ideas to mitigate the impact of foreclosures.
POSITION:  No positions in stocks mentioned.