Foreclosure And Its Effect On Non-Foreclosure Homes

Just Surfing for Foreclosure Information

As I was surfing the Net looking for foreclosure information, I stumbled across a study titled:

HOUSING POLICY DEBATE VOLUME 17 ISSUE 1
NOTE: The study is copyrighted by the Fannie Mae Foundation.

One of the co-authors, Geoff Smith, is a vice president at the Woodstock Institute, a policy group in Chicago. This study was conducted in Chicago between 1998 and 1999.

Foreclosure Study Findings

The study found that each foreclosure within an eighth of a mile of a single-family home results in a 0.9% decline in the home’s value. Smith is of the opinion that “If you were to replicate that study now, you’d probably find a bigger impact because there are more foreclosures and they’re bringing down the housing market overall.”

Since I am only familiar with the real estate market in a small geographic area, my first inclination is to agree with him. After all, foreclosed homes often fall victim to neglect and vandalism and what seems like a faster deterioration process. This has the inherent effect of dragging down the neighborhood.

Add the competition factor and I believe you have a formula that puts the decline figure into the 1 plus % range. Where it might have been 0.9%, it is now 1.7% to 1.9%.

Mind you, this is just one factor in the overall picture but given the numbers are large, it seems to be an important factor. If I am correct and it is 1.9% that means a house valued at $300,000 would decline $5700 on a straight line basis.

If this is a compounding number, the second year causes another 1.9% decline. I’ll assume the current real estate decline will be of only a two year duration. That may ease some of the sting in these declining numbers.

I put this (dated) study on the table to get some discussion about the relevance of its conclusion in today’s environment as well as to hear the actual experience in other parts of Foreclosure USA.

We all know foreclosures effect value. Calculating a precise percentage may be difficult but it is doable as the study proved. It would seem to me if we are investing in this market we would want to know as much as we can about price factors.