The External Costs of Foreclosure: The Impact of Single-Family Mortgage Foreclosures on Property Values

• Published in: Housing policy debate Vol. 17; no. 1; p. 3
• Main Authors: Immergluck, Dan, Smith, Geoff
• Format: Journal Article
• Language: English
• Published: Abingdon Taylor & Francis Ltd 01.01.2006
• Subjects: Foreclosure; Impact analysis; Mortgages; Property values; Single family; Studies; United States > US; Chicago Illinois
• ISSN: 1051-1482; 2152-050X

This research finds that each conventional foreclosure within an eighth of a mile leads to a .9 to 1.136 percent decline in the value of single-family homes. The average cumulative property value loss in this Chicago study ranged from $159,000 to $371,000 per foreclosure. Adopting the residual income approach over the traditional ratio approach would affect analysis of housing problems and needs, eligibility and payment standards for housing subsidies, and mortgage underwriting standards. This study measures the impact of foreclosures on nearby property values using a database that combines foreclosure data from 1997 and 1998 with neighborhood characteristics and nearly 10,000 single-family property transactions in Chicago in 1999. The results show that foreclosures have a statistically and economically significant effect on surrounding property values. Conservatively measured, foreclosing conventional loans on single-family properties in Chicago over a two-year period led to total property value losses of $598 million to $1.39 billion. These findings likely understate the cumulative effects of foreclosures on Chicago property values, because foreclosure rates have increased since the late 1990s.