From the IB Times:
Foreclosed properties in the U.S. only modestly depress the home prices of nearby properties, and the effects vanish a year after the distressed property is resold, according to a working paper by the National Bureau of Economic Research.
A seriously delinquent or repossessed home causes a 0.5 percent to 1 percent decrease to home values within 0.10 miles, described as “an amount that would most likely go unnoticed by the typical seller who does not have many distressed homeowners living nearby,” according to the report, “Foreclosure Externalities: Some New Evidence.” It was written by Kristopher Gerandi of the Federal Reserve Bank of Atlanta, Eric Rosenblatt of the Federal Reserve Bank of Boston, and Fannie Mae’s Paul Willen and Vincent Yao.
“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,” wrote the authors, who used public housing data in the study.
The authors cite three possible explanations for the faint relationship between foreclosures and falling home prices. They found the most likely reason to be a lack of investment by distressed property owners, which leads to deterioration of the property. Delinquent homeowners often lack the funds to maintain their property, and they have no incentive to improve it if they are at great risk of losing it to the lender, the authors said, which hurts the marketability of neighboring homes.
The two other explanations, which were thought to be less likely, were that the listing of a foreclosed property on the market increased local inventory and lowered demand, both of which could lead to lower prices.