Over 25 Percent of Home Price Depreciation Due to Proximity of Foreclosures: Study

The enormous numbers of foreclosures over the last six years have, of course, had immediate impacts on the families who lose their homes.  The effects include physical displacement, drained savings and retirement accounts, and ruined credit.  They also suffer longer-term financial impacts such as losing the ability to tap home equity for business or education purposes or retirement as well as losing the financial cushion home equity provides and the main vehicle for transferring wealth inter-generationally.

But there are ramifications to foreclosures that extend beyond those families who actually lose their homes. Communities with high concentrations of foreclosures lose tax revenue and incur the financial and non-financial costs of abandoned properties and neighborhood blight, while homeowners living in close proximity to foreclosures suffer loss of wealth through depreciated home values.

Three researchers from the Center for Responsible Lending (CRL) have produced an updated report on this secondary cost of mortgage foreclosures with a particular focus on the damage being done to communities of color.  Collateral Damage:  The Spillover Costs of Foreclosure released Wednesday was written by Debbie Gruenstein Bocian, Peter Smith and Wei Li and is an update of three earlier reports on the issue produced by the Center.  The last report was issued in 2009. 

The authors looked at loans that entered foreclosure between 2007 and 2011 using data collected by the federal government under the Home Mortgage Disclosure Act (HMDA) and a second data set from Lender Processing Services (LPS).  They calculated the number of foreclosure starts for each census track then calculated the loss of value of neighboring homes within 1/8 mile of the foreclosed property.

The authors found that $1.95 trillion in property value has been or will be lost by residents who live in close proximity to a property that has been foreclosed.   This figure includes the spillover impact of homes that have been foreclosed as well as future losses from foreclosures that are in process. 

Over one-half of this loss has been experienced in communities of color.  Minority neighborhoods have lost or will lose $1 trillion in home equity largely because of a high concentration of foreclosures in these neighborhoods.

In all neighborhoods these losses average out to $21,077 in household wealth or about 7.2 percent of the home's value.  However, in neighborhoods of color the average loss is $37,084 or 13.1 percent of the home's value.

Despite the magnitude of these losses the authors caution that they represent only the wealth that has been lost or will be lost as a direct result of being in close proximity to homes that have begun the foreclosure process. "We do not include in our estimate the total loss in home equity that has resulted from the crisis (estimated at $7 trillion)," they state, "the negative impact on local governments (from lost tax revenue and increased costs of managing vacant properties) or the non-financial spillover costs, such as increased crime, reduced school performance and neighborhood blight.