Live at the Forum: New Federal Reserve Bank of Atlanta Podcast and Online Q&A with Stephanie Rauterkus

Replies to This Discussion

Permalink Reply by Rebecca Cohen on November 12, 2009 at 1:10pm

In the podcast you're asked about whether there is a tipping point at which, when x percent of homes are in foreclosure, property values in the entire neighborhood may be adversely affected. Can you talk about some of the other factors - besides the incidence of foreclosures - that may impact nearby home values? For example, does the length of time that a home is in foreclosure play a role? Or a home's proximity to a foreclosed property? Are there other important factors at play here?

Permalink Reply by Stephanie Rauterkus on November 12, 2009 at 2:08pm

Yes, there are a number of confounding factors that impact nearby home values. Key factors are: how close are the neighboring properties, how long do the foreclosed properties remain in foreclosure and how well are those properties maintained during the foreclosure (and possibly subsequent REO) period. With respect to distance, there are varying estimates on how close a foreclosed property has to be to your home before you will see a spillover effect. These estimates range from 250 to 650 feet.

Permalink Reply by Maya Brennan on November 12, 2009 at 1:53pm

You talk about the impact of a foreclosed home on surrounding homes or on other homes in the neighborhood. How is that defined? Is there a certain radius within which foreclosures have a clear impact on other homes? Or do neighborhood boundaries (especially clear borders like major roads, waterways, railroad tracks, etc.) help to contain or partially contain the foreclosure virus?

Permalink Reply by Stephanie Rauterkus on November 12, 2009 at 2:12pm

Great question! As I mentioned above, the radius varies from researcher to researcher, but generally, we are talking about a fairly close proximity -- less than 650 feet. Practically speaking, waterways, railroad tracks, etc. should make a difference as they tend to impose natural neighborhood boundaries. However, at this stage, most researchers have not taken that close a look at individual neighborhoods. Many folks are currently trying to understand contagion and what elements help or hinder it. Most work that I have seen has focused on trying to determine how and why it spreads and if there is some "tipping point" where the virus begins to grow uncontrollably. So far, I've not yet seen evidence that that point exists although many have documented the spread of foreclosure and its virus-like attributes.

Permalink Reply by Patty Gustin on November 12, 2009 at 4:16pm

I am curious if any research has been done as to how we correct, stop or isolate the virus-like elements of this situation. Some of the basic underlying elements of home ownership lies in the psychology of the buyer/seller and economic societal environments along with some other varying factors such as jobs, etc. Looks to me like the foreclosures blood flowing from the institutions and their sale of foreclosures at far less then the real market value will spread the foreclosure affect in these areas. The blood of foreclosures must stop at the base with the banks, institutions and governmental agencies selling foreclosures. In researching a solution Nobel Prize winner Muhammad Yunus said it best "The system failed us. There's no reason why we should resuscitate it. We have to make absolutely sure that we don't go back to the same old normalcy. We should be creating new normalcy." Do you expect there will be a new normalcy? If so how?

Permalink Reply by HousingPolicy.org team on November 12, 2009 at 2:13pm

Stephanie, in the podcast you note that there are significant regional differences in the impact of foreclosed homes on surrounding property values. Can you provide more details on the characteristics of regions or markets in which foreclosures tend to have a greater impact on nearby properties versus those where the effects may be less impactful? Are there any particular strategies that these varying markets can apply to mitigate the hit to property values?

Permalink Reply by Stephanie Rauterkus on November 12, 2009 at 2:36pm

It seems that much of what we have learned in recent years about foreclosure is regional. For example, when we look at foreclosure rates nationwide, we notice that there are significant differences in these rates from state to state. Looking more closely at some of the markets that are hardest hit -- such as Florida, California, Nevada, etc. -- one or both of two common factors seem to be present in nearly all of these areas. The first factor is a significant pre-crisis housing price run-up. The second factor is a soft housing market and/or high sensitivity to changing economic factors. When we think of these issues in the context of spillover effects, we notice a strong neighborhood effect. That is, neighborhoods that suffer the most housing price decline tend to be those where foreclosures are most concentrated. Further, foreclosures are most concentrated in areas where the housing 'bubble' was the largest and the residents have been most negatively affected by the economic downturn. In the midwest in cities like Cleveland and Detroit we see the economic factors (such as joblessness) wreaking havoc on the housing market whereas in California we see the effect of a housing bubble that has begun to burst. Therefore, the characteristics of markets in which foreclosures tend to have a greater impact on nearby properties is a high concentration of homes and/or residents similarly affected by adverse economic conditions and/or an overall reduction in home values.

In a sense, some of the preventive strategies are unchanged. That is, those most negatively affected are homeowners who made housing decisions based on faulty underlying assumptions related to housing affordability and future market conditions. Unfortunately, when an entire neighborhood of homeowners makes these types of decisions, the effect can be disastrous -- as we have seen with entire subdivisions landing in default. Mitigation has to come in the form of homeowner education and vigilance against predatory lending and a push for high levels of homeownership at the expense of sound financial decisionmaking.

Permalink Reply by Ryan Sherriff on November 12, 2009 at 2:24pm

Although you mention that the wave of foreclosures resulting from subprime lending is dying down, many areas of the country are experiencing a second wave of foreclosures from other alternative mortgage products -- namely Alt-A loans. These loans were generally taken out by buyers with a different financial profile, and likely the resulting foreclosures are affecting different neighborhoods than subprime foreclosures. Still, do you think this new wave of foreclosures may undermine efforts to deal with the subprime foreclosure crisis, particularly in that resources will likely be spread thin in dealing with both foreclosure crises?

Permalink Reply by Stephanie Rauterkus on November 12, 2009 at 2:46pm

One of the things that I find quite interesting about this issue is the changing nature of the subprime loan. A few years ago, subprime loans were those issued by subprime lenders. Quickly we learned that many "traditional" lenders were also operating in the subprime market, so we had to re-think our definition of a subrime loan. We then, focused our attention on the subprime borrower and began thinking of a subprime loan as one made to a subprime borrower who could not qualify for a prime loan and therefore credit scores became the key determinant. This Alt-A category was this gray area where lenders believe that the borrower is a good credit risk but still cannot qualify for a prime loan for any number of reasons such as the inability to verify income. As it turns out, many of these Alt-A loans appear to be just subprime loans in disguise. For that reason, many people (researchers in particular) see Alt-A loans as a different class of loans. Instead, we have begun to look at these loans as either prime or non-prime and address foreclosure mitigation efforts in that way.

Personally, I don't think that this new wave of foreclosures (in the residential market) will undermine efforts to deal with the crisis because I believe many people took a harder look at this gray area early on. I think that failures in this loan class do increase our initial estimates regarding the extent of the crisis, but I think they've been on the radar long enough that some of this fallout is expected.