Foreclosures, Neighborhoods, and Home Values

Housing Wire has a post today on the foreclosure glut in Milwaukee. When foreclosure reach a high level there is a negative impact on values and neighborhood conditions. Some of these effects are obvious, some less so:

1) The foreclosed house is put on the market. More supply pressures prices down.

2) If the servicer is not the lender there may be a bias to liquidate quickly rather than maximize value. The distress sale at a lower than market price becomes a new comparable establishing a new (lower) value level for similar houses in the neighborhood.

3) During the period starting with the homeowner's financial distress through foreclosure and liquidation the house is probably not being well maintained because the homeowner lacks financial resources and/or motivation and the lender has logistical problems staying on top of maintenance issues. This could be minor (e.g., the grass doesn't get mowed) or major (e.g., the roof leak doesn't get fixed and the ceilings collapse). Either way the house value is negatively impacted, leading to a low value comparable as in 2) above.

4) If the maintenance problem is visible, the entire neighborhood takes a hit. No one likes living in neighborhoods with signs of disorder, and in a market with choices buyers will avoid such neighborhoods. Wesley Skogan describes the impact of disorder on housing markets in more detail in Disorder and Decline.

It's easy to imagine how these effects can lead to even more foreclosures, creating a downward spiral which is very difficult to break. Also, the maintenance issues are not limited just to properties actually in foreclosure. Borrower's who don't have equity have little incentive to maintain their properties. It does not take long for deferred maintenance costs to mount rapidly and take their toll on the property's value. Even if a loan modification addresses an immediate payment problem if the modification doesn't address the borrower's lack of equity the lender could be facing a big maintenance hit down the road.