Foreclosure Study Shows Dramatic Value DropAugust 23, 2010 - 9:56 AM | by: Molly Line
Nationwide, more than a half million homes fell into foreclosure in the first half of 2010.
More than 900,000 were repossessed in 2009.
Now a new study, conducted by MIT and Harvard researchers, reveals the drop in value to a foreclosed property is even more staggering than many would believe.
“Foreclosed homes sell for less, not just a little bit less, but much less than comparable homes sold in the same area at the same time but voluntarily outside the foreclosure process,” explains Harvard Professor of Economics John Campbell. “In fact, the discount on average is about 27% which is really a very large number.”
And a foreclosure is bad news for the neighborhood…
The study-which examined 1.8 million home sales in Massachusetts from 1987 to 2009 reveals nearby homes within 250 feet of a foreclosure lose 1% of value.
One reason- the condition of a foreclosed house often deteriorates and falls into disrepair.
Real Estate Agent Danny Griffin runs his own firm selling property across Massachusetts. He points out that foreclosures often sell for a discount as banks look to quickly unload unwanted property.
“It becomes a hot potato on their books and they need to get rid of it and when somebody needs to get rid of something that’s the deepest discount and not good for the neighborhood,” said Griffin. “And a foreclosure, not being lived in, can absolutely have the broken window effect.”
Often perceived as a retreat for the wealthy second home owner, Cape Cod is among the hardest hit areas in the state with foreclosure deeds up 74% in the first half of 2010 from last year in Barnstable County, according to the Warren Group, a real estate research firm.
Griffin says home values have fallen in general over the last several years and are now more in line with income levels. The drop is compounding the loss home owners facing foreclosure can suffer when a mortgage is higher than what a property is worth.
Few examples can better illustrate the loss in worth than a two bedroom condo just off the main street in seaside Hyannis, Massachusetts. Griffin sold it several years ago for 190,000.
“Now three years later it’s a foreclosure. This property has actually been taken back by the bank, owned by them, given back to me as a realtor to resell. Within 30 days we had four offers on a pricing of 52,000 dollars,” said Griffin. “Nearly a 75% discount on this foreclosed property only three years from the purchase date at 190.”
Griffin says the surrounding condos will suffer a significant loss in value.
“When you have a condominium complex like this, where everybody is so intimately involved value wise, there’s no differentiated land, it’s all shared, this is absolutely going to have a downward effect, more so than an individual house,” says Griffin.
Campbell believes the study has wide-reaching implications for lenders and policy initiatives, particularly when banks are faced with jaw dropping statistics on value loss.
Efforts have been made on the state and federal levels to stabilize struggling communities.
Massachusetts Governor Deval Patrick signed into law protections against predatory lending and requirements for lenders to make good-faith efforts to work with families threatened by foreclosure.
The Federal government has paid out 1.5 billion dollars of 50 billion in TARP funds for mortgage modifications. Since the program started in May 2009, more than 1,282,912 trial modifications were undertaken. More than 520,000 of those modifications have been canceled. Roughly 364,000 remain active. 398,000 trial modifications were extended to permanent modifications. Nearly 9,000 of those were subsequently canceled.
Professor Campbell believes the system needs to be reworked.
“This just goes to the problem of distinguishing the people who can be helped from those who can’t be helped. The medical term for this is triage. You have to solve the problem with triage,” said Campbell. “Identify who can really benefit from the public funds and who can not.”
States with Highest Foreclosure Rates according to RealtyTrac
-Nevada, Arizona, Florida, California, Utah, Georgia, Michigan, Idaho, Illinois, Colorado.