Furthermore, foreclosures have been portrayed as death knells for neighboring property values, but a recent working paper from the Federal Reserve Bank of Atlanta says home prices, for the most part, are only marginally impacted by distressed homes.
In fact, the time period when property values are most affected by a nearby distressed asset is when the borrower is still in the property, but seriously delinquent, according to Kristopher Gerardi, Eric Rosenblatt, Paul S. Willen, and Vincent W. Yao of the Atlanta Fed Bank.
The research report attributes this anomaly to the fact that delinquent borrowers are struggling with cash flow and less likely to keep up with property maintenance. Delinquent borrowers also hold their homes at arms length when they feel a foreclosure is imminent, so they stop investing in properties.
But this pessimism toward maintenance changes when the bank later steps in or when the home is sold off again to a new owner who invests in the property.
“We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner,” the report said.
Overall, the research findings suggest foreclosures and delinquencies don’t have as much of an impact on neighboring home prices as many would expect.
When looking at just seriously delinquent loans and REOs, Fed Bank of Atlanta researchers found that homes within 0.10 miles of a distressed property only experience a 0.5% to 1% value decline on average.
The actual value loss is “likely to go unnoticed by the typical seller who does not have many distressed homeowners living nearby,” the researchers concluded.
“Perhaps the most important conclusion that one should take from this analysis is that the effects of foreclosure and distressed property in general on the prices of neighboring homes are fairly small,” the team asserted in their final report.