As homeowners are foreclosed, they often lose access to low-cost sources of loans, which can lead to lower spending in other areas. With millions of mortgage owners reducing their economic activities, the effects on local, state and national economies can be profound. The results presented here highlight the fact that foreclosures can have different impacts depending on the characteristics of the neighborhood in which they occur. Even if the flow of consumers receiving signs of foreclosure stopped immediately, this level of demand would take more than half a year to exhaust the current foreclosure inventory.
Studies differ in the exact size of the effect, but most find an impact of about 1 percent by foreclosure on nearby homes. They interpret this pattern as suggestive evidence that foreclosures at less than 300 feet depress property values due to the denial effect, while foreclosures that are between 300 and 500 feet apart reduce prices through the supply effect. But they must be differentiated in the sense that foreclosure on a rental building does not increase the supply of owner-occupied housing and will not remove a household from the group of potential occupying owners, as will foreclosure on a single-family home. On the one hand, obtaining a mortgage after a foreclosure can be difficult because of the impact on your credit and the fact that you'll likely be subject to a waiting period before you have the opportunity to get a new loan.
I estimate that home prices within 250 feet of a foreclosure are reduced by approximately 2 percent due to foreclosure due to the deactivation effect, while the supply effect is nearly zero. If all of these 400,000 homes go into foreclosure and go public, that will add about 24 days of supply to the housing market, given the current rate of monthly sales of 483,333 existing homes. According to the Mortgage Bankers Association, more foreclosures are coming, and the number of mortgages in foreclosure or with more than 90 days of delinquency is at a record high of about 4.2 million. Therefore, even before foreclosure, and certainly during the course of a foreclosure, to the extent that deferred maintenance and lack of investment are visible, this may diminish the convenience of a neighborhood and have a negative effect on the prices of nearby properties.
Such a large supply of homes in or near foreclosure has the potential to have a major impact on home prices. From the time you didn't make your first mortgage payment to the foreclosure sale of your home, there are several steps in the foreclosure process. When comparing the economic results of states that require a judge to issue a judgment to approve a foreclosure sale (“judicial statements”) and the second way in which foreclosures can have negative effects on the value of nearby properties is to cause some kind of “negative externality”. However, foreclosures also generate direct costs for local governments at a time when the economic recession has already affected their budgets.
This finding implies that different approaches may be needed to mitigate the negative effects of foreclosures in different neighborhoods.