Furman Center Study Confirms Collateral Damage of Nation’s Home Foreclosures

By Amy Armstrong

As the national mortgage crisis worsened throughout 2008, an increasing number of communities faced declining home prices and high rates of foreclosure. Central to the ongoing call for government intervention in the crisis is the claim that foreclosures not only hurt those losing their homes, but also have significant spillover effects: they reduce the value of nearby properties and local tax bases and they displace tenants. The extent to which foreclosures drive down neighboring property values or displace tenants, and how those impacts may vary according to neighborhood characteristics and local housing markets, have become crucial questions for policy makers, but few empirical studies have examined these issues.
    The Furman Center for Real Estate and Urban Policy at the School of Law and the Robert F. Wagner Graduate School of Public Service have responded by examining the sometimes nuanced effects that foreclosures have on neighborhoods. A research team led by Vicki Been, Elihu Root Professor of Law and director of the Furman Center; Ingrid Gould Ellen, associate professor of public policy and urban planning at Wagner and the center’s co-director, and Jenny Schuetz, an assistant professor of economics at City College and one of the center’s senior research affiliates, explored these ramifications while offering methodological improvements over prior research efforts.
    Considered were data on foreclosure filings and sale prices over a six-year period. The researchers took into account unobserved characteristics of the neighborhood, as well as broader economic conditions. By controlling for the neighborhood characteristics that may influence sales prices and the likelihood that a foreclosure will occur nearby, they were able to isolate the impact of foreclosure filings from the impact of other market conditions. The Furman Center also studied the impact of foreclosures during a period of price appreciation in the New York City housing market.
    There are a number of hypotheses about why foreclosures may have a negative impact on surrounding housing prices. Property owners who are in default on their mortgages may be less likely to maintain or upgrade their homes, for example, while foreclosed-upon properties may sit vacant and suffer further physical decline, leading to neighborhood blight and deflated prices. In addition, distressed properties sold either at foreclosure auctions or pre-foreclosure sales may be more likely to be sold to investors and therefore to become renter-occupied and less well maintained. Properties with distressed loans also are likely to sell at a discount, affecting the price of comparables used to estimate neighboring property values.
    Even during a period of price appreciation, foreclosures have a depressing effect on nearby sales.
     “It’s clear that properties near recent foreclosure filings on average sell at lower prices than comparable properties in the same neighborhoods that are not near foreclosure filings,” says Ellen. “However, there seems to be something of a threshold effect. The presence of one or two foreclosures nearby doesn’t seem to have a significant effect on a property unless those foreclosures are on the very same block.”
    The Furman Center’s research also documents the impact foreclosures have on another group of innocent victims—tenants living in buildings that enter foreclosure.  Last April, the Furman Center released an analysis of foreclosures that revealed that 60 percent of the properties going into foreclosure in 2007 in New York City were two- to four-family or multi-family buildings, representing at least 15,000 renter households.
    “The number of rental house¬holds at risk is troubling,” says Been, “but the plight of rent¬ers in foreclosed buildings has not been part of the national conversation.”