There is a popular misconception that, when the neighborhood starts to sour financially, so do all the home prices in the area. A single foreclosure can certainly cause damage to the owner, but what actually are the repercussions to surrounding properties? Don't stress your financial plan over a distressed home in the neighborhood before knowing the facts.
The housing market
Back in 2007, the bubble burst on private home sales, sending the economy into a tailspin. Years later, we are now seeing stabilization in the housing industry as well as the rest of the U.S. market, but some are still wary of the pressure foreclosed homes can put on the rest of the nation.
The San Francisco Chronicle wrote that a study in 2009 by economists from Harvard and the Massachusetts Institute of Technology (MIT) found those living near foreclosed houses could see up to a 27 percent reduction in value. Those living in lower-priced areas or homes saw much greater decreases in overall worth, while those in more upscale neighborhoods still took a hit. Real estate brokers tend to mark down homes in these areas for that reason, as they inherently expect valuation to be lower.
These misconceptions could be hurting homeowners, however, as a recent study proves. The Federal Reserve Bank of America released a report showing that homes within a tenth of a mile of a foreclosed property shouldn't see more than a 1 percent drop in valuation. Market value doesn't decrease, the study showed, just the neighborhood perception.
Paul S Willen, an economist who worked on the report, said much of the idea homeowners have about foreclosed devaluation comes from nearby residents assuming that property is no longer being cared for. A single home with a lower price tag due to default shouldn't have as much impact on those nearby, he said in an interview about the report.
"We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values," Willen explained. "The magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner."
Home prices have been on the rise in recent months, showing the economy may finally be recovering for certain. As a financial adviser for valuation and homeownership advice if you're concerned about getting the most out of your homestead investment.