US Foreclosures Have Modest Impact On Nearby Home Prices: NBER

A seriously delinquent or repossessed home causes a 0.5 percent to 1 percent decrease to home values within 0.10 miles, described as "an amount that would most likely go unnoticed by the typical seller who does not have many distressed homeowners living nearby," according to the report, "Foreclosure Externalities: Some New Evidence." It was written by Kristopher Gerandi of the Federal Reserve Bank of Atlanta, Eric Rosenblatt of the Federal Reserve Bank of Boston, and Fannie Mae's Paul Willen and Vincent Yao.

"Perhaps the most important conclusion that one should take from this analysis is that the effects of foreclosure and distressed property in general on the prices of neighboring homes are fairly small," wrote the authors, who used public housing data in the study.

The authors cite three possible explanations for the faint relationship between foreclosures and falling home prices. They found the most likely reason to be a lack of investment by distressed property owners, which leads to deterioration of the property. Delinquent homeowners often lack the funds to maintain their property and they have no incentive to improve it if they are at great risk of losing it to the lender, the authors said, which hurts the marketability f neighboring homes.

The two other explanations, which were thought to be less likely, were that the listing of a foreclosed property on the market increased local inventory and lowered demand, both of which could lead to lower prices.

The authors concluded that speeding up the foreclosure process would allow local housing markets to heal faster, but such practices raise additional problems, as banks have delayed foreclosure procedures due to improper paperwork and some homeowners have acted to keep their homes by seeking refinances and principal writedowns on existing mortgages.

"Our results suggest that the key to minimizing the costs of foreclosure is to minimize the time that properties spend in serious delinquency and in REO," wrote the authors, refering to real estate-owned (e.g. bank-owned) properties. "On one hand, this implies putting pressure on lenders to sell properties out of REO quickly. On the other hand, and perhaps much less palatably, it implies minimizing the time a borrower spends in serious delinquency, which means accelerating the foreclosure process."