Foreclosures Cut Home Values by 27%

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It’s common knowledge that entering into foreclosure reduces the price of a home, but until recently, it was unclear just how much of an impact it had.

According to a study published last month in the American Economic Review, the average house loses 27% of its value if it has been foreclosed. The study, which was authored by researchers at MIT and Harvard University, analyzed data from 1.8 million home sales that took place in Massachusetts to come up with this result.

Beyond this, the study also found that foreclosures have a noticeable impact on the values of nearby homes. For every home that is foreclosed within .05 miles of where you live, your own home value drops by about 1%. In fact, as Brian O'Connell pointed out in a recent MainStreet article, if you notice three or more homes in your neighborhood with a foreclosure sign in front, you should start taking steps to ensure that your own home isn't the next one to go underwater.

That said, the study also found that only homes that are within a quarter mile of the foreclosed property were negatively impacted by a foreclosure.

"It's not surprising that there is a discount due to foreclosure," Parag Pathak, one of the study’s co-authors said in a press release. "But it is surprising that it's so large."

By comparison, the study found that homes that have been put on sale because the owner has died or gone bankrupt do not suffer nearly as severe a price drop. Homes sold after someone has died lose an estimated 5%-7% of their value, while those sold after the homeowner declares bankruptcy lose only 3%.

In the case of homes where the owner has died, the authors of the study speculate that these homes lose value mainly out of concern that the property has not been well maintained. Meanwhile, for homes that have been foreclosed and vacated, there is a concern that it has not only been poorly maintained but potentially vandalized as well.

While foreclosures are undoubtedly problematic for homeowners in the neighborhood, they  provide a good opportunity for those looking to purchase a home below market value. If you’re interested in buying a home for cheap, check out MainStreet’s recent roundup of five foreclosed homes currently on sale. For homeowners, there are existing options to insure your home againt a possible drop in value.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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