Wednesday, September 12, 2012

The effect of foreclosures on neighboring property

What happens to the value of other nearby houses when a property goes into foreclosure?  That's a question investigated by four economists from the Federal Reserve Bank of Boston in a recently released paper.  A story in this morning's Globe brought my attention to the study which can be found in its entirety on the Boston Fed's website.  Since the folks who wrote this are all Ph.D.s in economics, there are many formulas that I don't understand but the Abstract, which I've set out below sets out the findings in pretty clear terms:

In a recent set of influential papers, researchers have argued that residential mortgage
foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more
robust identification strategy combined with new data that contain information on the
location of properties secured by seriously delinquent mortgages and information on the
condition of foreclosed properties We find that while properties in virtually all stages of
distress have statistically significant, negative effects on nearby home values, the magnitudes
are economically small, peak before the distressed properties complete the foreclosure
process, and go to zero about a year after the bank sells the property to a new homeowner.
The estimates are very sensitive to the condition of the distressed property, with a positive
correlation existing between house price growth and foreclosed properties identified as
being in “above average” condition. We argue that the most plausible explanation for these
results is an externality resulting from reduced investment by owners of distressed property.
Our analysis shows that policies that slow the transition from delinquency to foreclosure
likely exacerbate the negative effect of mortgage distress on house prices.

1 comment:

Ysabella said...

On the other side of the coin, others are also on the lookout for Logan Foreclosures especially if they want to have their own property or perhaps want to start their own real estate business. Still, people are benefiting from this.