Foreclosures Reduce A Home's Value By 27%, MIT Study Finds

Thinking about defaulting on your mortgage? You might be putting a serious damper on the value of your neighbor's home.

A single foreclosure can decrease value of homes within 250 feet by an average of one percent, according to a recent MIT study.

The study, which examined 1.8 million home sales in Massachusetts from 1987 to 2009, also found that the typical foreclosed home has its post-foreclosure price slashed by an average of 27 percent. (That number tends to be larger for houses with "low-priced characteristics in low-priced neighborhoods," the study found.)

By contrast, the authors note, if a house is sold after the death of an owner, the value drops five to seven percent. If a homeowner declares bankruptcy, the study shows, the price only falls three percent.

Why do foreclosures cause such a large decline in a home's price relative to other kinds of forced sales?

In the study's working paper, MIT economist Parag Pathak and two Harvard researchers, John Y. Campbell and Stefano Giglio say that foreclosed houses sell at such low prices "both because they may have been physically damaged during the foreclosure process, and because financial institutions have an incentive to sell them quickly."

Read the whole report below:

Forced Sales -

Comments

[Dr Juan]

11:26 PM on 08/08/2010

Here comes the second dip - probably worse than the first!

Underwater is best predictor of default and foreclosure. Stimulus failing since factories have been moved to countries offering the cheapest labor so there is nothing left here to stimulate. Among service companies remaining, healthcare and Obama uncertainty having negative impact on hiring. City State and Federal tax shortfalls prove business and income are both dramatically down. Unemployment benefits are expiring for many despite the extensions. Those that find jobs are taking pay cuts to get them. Bush tax cuts are expiring. Banks confiscating wealth and bailouts for bonuses and not lending to home owners or business. Building starts are lower than in a long time...... It looks to me like the sky is falling and the crunch will be worse around the globe.

[macchugsid]

08:15 PM on 07/25/2010

The foreman at my workplace just told me last week that he was $60,000 underwater. Not because he took out a stupid loan or was greedy. He is in that situation because home prices have dropped that much in his neighborhood. He does not miss payments nor spend more than he has. He is a victim of the current economic climate, no more, no less. His home is in what would be considered an upscale neighborhood where we live. He has had lawyers tell him to "walk away". He is the kind of person that needs some sort of relief.

I refinanced my own home during the run up in home prices. I had CountryWide tell me they would give me $100,000 more than I needed to fix my financials. I said no thanks and here I am years later looking at a home that is worth about $10,000 more than what I owe. I just did not take more than I needed. Nothing prescient about it I just did not let greed overtake common sense.
If you need to walk away to survive then do it! Banks and rich folks do it all the time.

[Tiggy]

07:05 PM on 07/25/2010

Had a neighbor who was out of work for over a year. An Engineer at that! Once he obtained work he asked the bank to work with him...his reply, "NO!" He had no choice and he actually felt bad for us, his neighbors. And to read this article is a slap to those like him who did everything right and still was told to take a hike by the bank. The banks have done us no favors and the neighbors don't pay our bills...do what you have to do!

[Peter007]

09:01 AM on 07/25/2010

The 27% decrease in value is an average. A house in Detroit or Newark, NJ may drop 75% in value because the neighborhood is going down hill while a house in a well established suburban area will only lose 5% to10% of its value.
The subprime boom did a lot to raise the values in poor urban areas. People took out home improvement loans and homes were being renovated to compete with suburban properties.
Once the subprime pump was stopped, these neighborhood began retreating back to the 1970's era where gangs and abandoned houses were the norm.

[anotheRedherring]

09:57 AM on 07/24/2010

this article is designed to leave a sliver of shame to losing one's house. the wealthy skip out on theirs with impunity and no conscience whatsoever. I advise we do as they do and use the scorched earth policy.

[jcaunter]

02:29 AM on 07/25/2010

It was supposed to induce shame? Heh. I read the article and I felt good about it--we are doing the economy a service by deflating the asset bubble as fast as we can, despite Obama's attempts to reinflate it.

[FirstSpeaker]

02:36 PM on 07/23/2010

So I will finally have my revenge against those neighbors who called the pet police on my poor little dog. Strategic foreclosure!

[DebtNavigation]

10:57 AM on 07/23/2010

The short answer here is for homeowners who are NOT contemplating foreclosure to realize that government-mandated (or government-interventionist) compassionate treatment for their neighbors is not a "moral hazard" free ride for their neighbors, but a solution that benefits everyone. HAMP isn't really helping anybody (the "successful" modifications are window dressing created by calling up never-late grannies in the 29th year of their mortgages and asking if they want their payments reduced). A new version of FDR's HOLC, by contrast, could help 80% of borrowers if history is any guide.

[pebblewriter]

02:19 PM on 07/23/2010

I absolutely agree. I'd much rather the Fed pumped $1 trillion into a Home Owners Loan Corp than FNMA/ FHLMC paper. At least that way, help would be directed to those who need it (i.e. folks to which banks have turned a deaf ear.) I imagine the meltdown would have been much less severe had the government taken this path rather than its ineffective attempts to encourage, incentivize or shame banks into helping people.

[okradingle]

06:19 PM on 07/23/2010

Reduce the principal!

[bbrecht]

09:12 AM on 07/23/2010

the impact was worse in ""low-priced characteristics in low-priced neighborhoods," gee... could it housing prices are too high? Did those same neighbors watch the value of their home go up 100% in a few short years thanks to banking shenanigans?

[fleaba]

01:16 AM on 07/23/2010

This is the most ridiculous piece of b*lls**t journalism I have read in awhile.
As someone who lost their home due to recession related job loss, I'm here to tell Mr. (someone-should-kick-him-in-the )Hind-man, that everyone is expendable and if he isn't careful and keeps writing trash he too can be unemployed. At that point, I will venture to say that not only will his neighbors be pissed at him, he will also be suffering from severe depression, trying to figure out how to pay an attorney for his bankruptcy, looking for work and ...oh yeah, trying to put food on the table.

[morgan1]

06:55 AM on 07/23/2010

Thanks. See my own comment.

[floodberg]

06:53 PM on 07/22/2010

DID WALL STREET WRITE THIS FOR HUFFPO?

"Thinking about defaulting on your mortgage? You might be putting a serious damper on the value of your neighbor's home."

This smacks of the argument several years ago that it was ok for corporations to go bankrupt because it was a 'business decision,' while individuals were 'irresponsible.' Some people actually bought that pack of lies.

If it's a choice between personal survival or letting your neighbors take a hit, go for survival folks. Your neighbors will understand.

[anotheRedherring]

10:50 AM on 07/24/2010

hear hear! you said it better than I could.

[AZreb]

11:03 AM on 07/24/2010

And your neighbors may be facing the same problems you are, too. Sure, bail out the banks and big financial institutions, the car companies but let homeowners twist in the wind.

And the new program for helping homeowners has not been very successful. Even those whose payments have been modified are sometimes unable to make those payments if they are still unemployed or under-employed.

Guess I just get a little angry when I see good people, responsible people, those who have tried every way possible to keep their homes raked over the coals by an author such as this one. Guess the author wants those people to dig a deeper hole for themselves in order to help their neighbors property values.

[munki]

04:14 PM on 07/22/2010

Yes, but if BANKS are NOT cooperating... until you pull plug...

what is the choice? let all of us think about this...

[JDogger]

11:55 AM on 07/22/2010

A lot of these comments address foreclosures, and some talk about values, and whether one should continue to make a mortgage payment on a house that is worth less than what they paid for it! Some urge such homeowners to "walk away".
So, if I undersatnd this, many commentors think their home should always appreciate, but these same people are more than willing to finance a car and watch it depreciate while continuing to pay those payments.
People, you buy a house for shelter, a roof over your head. Buy one you can afford and make your payments. If the value goes down WHO CARES, it's a roof over your head. Everyone who walks away hurts the next guy seeking a mortgage.
Anyone who advocates walking away is more than willing to screw the next guy for their own benefit... and that makes you a WallStreet Banker!!!

[okradingle]

06:23 PM on 07/23/2010

Piffle. This is akin to playing a game in Vegas and after you've lost your money, finding out the dice were loaded. "You signed a contract, it's a home, etc"...none of it applies, since the price many are paying were inflated by the Wall Street crooks.

This is not your typical recession related decrease in value.

[USNDC]

07:45 AM on 07/22/2010

Mention the foreclosure crisis to the Obama Administration ... and nothing ... crickets chirping.

Struggling homeowners are out of options ... and the "bailed out" Banks are going to foreclose.

The neighbors property values will drop ... causing even more neighbors to become "upside down" with their mortgages ... causing even more homeowners to decide to strategically default ... resulting in even more foreclosures ... causing the neighbors property values to drop even further ... destroying the local governments tax revenue base ... forcing city/county services to be cut ... resulting in government workers losing their jobs ... and so on.

OBAMA has turned his back on this issue ... and the "bailed out" Banks are going to foreclose on 1,000,000 more families this year.

Why Barack ?

[SF TKF]

10:11 AM on 07/22/2010

What do you expect him to do? I've yet to see anyone (left, right, center, whatever) lay out a workable solution.

[USNDC]

11:22 AM on 07/22/2010

Senator Dick Durbin (D-Illinois) ... sponsor of the Bankruptcy Cramdon Bill.

Pass the Bankruptcy Cramdown Bill into law.

There you have it ... an actionable plan ... and no cost !

[JDogger]

11:45 AM on 07/22/2010

Sheila Baer, head of the FDIC, made a proposal that would have significantly addressed the housing crisis before TARP was passed. Obama, Bernanke & Geithner turned it down because it made too much sense and didn't cost nearly enough... LOL

I think they truned it down because she was a woman.

[JimVinFalz]

05:17 AM on 07/22/2010

You should pass the hat among your neighbors. I'm sure they will pitch in out of mere self-interest.

[Jose 58]

03:52 AM on 07/22/2010

Most homes in this country are way over priced. What is a home anyway, just some dirt, cement, wood, wire, pipe, drywall and roof shingle. Not much more that $30,000. in supplies and $10,000. to $20,000. in labor. Paying more is just one big rip off.

[PISTRIC]

05:01 PM on 07/23/2010

You forgot to add the "land" value.. professor..