January 25, 2012
Residential Foreclosure, Vacancy, and Abandonment
Posted by Tom Fitzpatrick

Since the mid-2000s, researchers have been studying the impact of foreclosures on surrounding property values.  A colleague and I recently finished an important contribution to this line of research.  Anyone attempting to craft responses to the housing market's current woes, particularly efforts to stabilize neighborhoods and home values, should give two of our results serious consideration. 

First, our findings suggest that most prior studies overstate the impact that foreclosures have on surrounding property values.  The reason they overstate the impact of foreclosures is that they don't take into account long term vacancy or property abandonment even though vacancy and abandoned property also drive down surrounding property values (either by adding units of supply or dis-amenities, depending on the vacant home or abandoned property's condition).  In our study, we include measures of all three (both individually and collectively) and we find (in Table 10 on p.42, for those interested) that when you only measure one of the three factors that drive down housing values, you overstate the influence of the factor you are measuring.  This result is important because it tells us that foreclosures do not decrease surrounding property values as much as previous studies suggest, and that attempts to stabilize markets should address vacancy and abandonment in addition to foreclosure.

Second, and more importantly, we illustrate how foreclosure, vacancy, and abandonment have differential impacts on weak housing markets relative to average housing markets.  (The following information summarizes Tables 12-14.)  When we subdivide Cuyahoga County's (home to Cleveland) housing markets by strength, we see huge differences.  In the markets that more closely approximate the average market in the US, we see what prior research and theory would predict: foreclosures, vacancies, and abandoned housing all substantially lower surrounding home values.  In these markets, long-term vacancy and property abandonment are not as common or as problematic as foreclosure.

But in weaker sub markets, things are strikingly different: long term vacant homes and abandoned properties drive down prices more than foreclosures, and are more common than they are in normal markets.  Part of what drives this result is that lenders are attempting (and usually succeeding) to selectively foreclose on the "best-of-the-worst:" properties that have some prospect of resale because they are in the best neighborhoods in weak housing sub markets. 

Understanding the relationship between foreclosure and abandonment is tricky: in weak markets, foreclosure accelerates abandonment, but does not appear to cause it.  Foreclosed properties are sometimes abandoned, for example when lenders foreclose on a property that turns out to be among the worst-of-the-worst, they sell it to a property speculator that usually abandons it.  But abandonment is really driven by long-term population loss that resulted in an oversupply of housing relative to demand.  Plenty of property has been vacant long term or abandoned but has not been through a foreclosure recently. 

The fact that vacancy and abandonment are bigger problems in weak housing markets than foreclosure is not surprising to those that have studied, worked, or lived in these markets.  People with no experience with weak housing markets often overlook the problems of vacancy and abandonment, instead focusing on foreclosure.  It is critical for policymakers to understand the differences between average and weak housing markets because the best tools for stabilizing housing in them differ. Weak markets need subsidies for the removal of vacant or abandoned homes, and less funding for rehabilitation.  Likewise, proposals to move REO to rental property might not be as wise in weak markets as they are in average or stronger markets.

There are some promising local practices, such as modern land banking and low-value REO donation accompanied by per-property demolition grants that will help correct this supply/demand imbalance.  Still, I personal think it would be better in the long run if policymakers paid more attention to right-sizing weak housing markets, and less to subsidizing rehab and new construction in them.

Economics, Empirical Legal Studies | Bookmark

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