CRL Looks at Spillover from Foreclosures

The Center for Responsible Lending (CRL) estimates that between 2007 and 2012 some 12.5 million homes in America have been put into the process of foreclosure.   Beyond the harm this has done to the families who have lost or face the loss of their homes there is a spillover effect on the neighborhood and the larger community.  In an update to a report issued in 2012, CRL has just published a brief on the economic impact on the larger community when a home in the area is foreclosed. 

CRL based its analysis on mortgage data collected by the government under the Home Mortgage Disclosure Act and by Lender Processing Services.  It estimated the number of foreclosures in each community, the number of affected neighboring properties, and the loss in value to those properties applying a the 2008 estimate derived by Harding, Rosenblatt, and Yao of a 0.744 percent house price depreciation to every home within 1/8 mile of a foreclosure.  The depreciation amount was then aggregated at various geographic levels to arrive at the total of spillover losses.

The Center estimates that about 95 million homeowners have lost equity when a nearby home has gone into foreclosure.  The aggregate property value lost by these homeowners is estimated at a staggering $2.2 trillion.   The average loss for families, both already suffered as well as estimated future losses, average $23,150 in household wealth or 8.8 percent of their home's value. 

The brief, one of five that CRL has published updating a study published in 2012, found that over half of the spillover losses have been felt in communities of color.  About $1.1 trillion in property values has occurred in minority neighborhoods, reflecting the higher concentrations of foreclosures in those communities.  In communities of color the average current and future losses (based on homes that have entered but not completed foreclosure) is estimated at $40,297 or 16 percent of the homes' value.

CRL based these estimates only on the losses suffered by those in close proximity to homes in foreclosure.  They did not include the estimated total of $7 trillion in home equity that resulted from the housing crisis, the negative impact from loss tax receipts and increased costs of managing vacant and abandoned property that has fallen on local governments, or the non-financial spillover costs such as increased crime, and neighborhood blight.

CRL said that research suggests that the spillover impact increases during the year leading up to the foreclosure sale, after which the negative effect stabilizes.  Given that there is a variation depending on the stage of foreclosure the property is in, CLR said it recognizes that the full spillover impact of all of the foreclosure starts may not have materialized yet. 

Finally, spillover loss, like any loss in home equity, may be temporary and there is some evidence that property values may eventually rebound months or years after foreclosed properties are purchased by new owners.  Despite this eventual rebound, CRL said they believe it is important to capture the aggregate loss in wealth incurred by nearby homeowners throughout the crisis, even if some of that equity may have been restored.