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: