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Studies find home prices and crime rates not greatly impacted by foreclosures

Several studies published in the September issue of Social Science Quarterly found only tenuous links between the rate of foreclosure and upticks in the neighborhood crime rate. Though one study found the opposite.

“Findings reveal that crime and foreclosures are spuriously related; controlling for confounding factors such as concentrated disadvantage and the political hierarchy of communities renders the foreclosure-crime association nonsignificant,” concludes the authors of the study titled “Home Foreclosures and Community Crime: Causal or Spurious Association?”

Yet, when the research is hyper-focused on Indianapolis from 2003 to 2008, the opposite seems true.

Foreclosures cause property and violent crimes to rise, according to another SSQ study. “In addition, foreclosures had greater effects on reported UCR crimes in stable neighborhoods, especially those with more owner-occupied homes,” that study said.

A third study finds that high housing-mortgage stress levels do not seem to have a direct link to crime overall.

“Despite anecdotal evidence of and growing fear that the foreclosure crisis was accompanied by increasing crime rates in cities hardest hit by the foreclosure crisis, we found no evidence that metropolitan areas with higher levels of housing-mortgage stress had higher rates of violent or property crime,” according to research from Indiana University.

Furthermore, foreclosures have been portrayed as death knells for neighboring property values, but a recent working paper from the Federal Reserve Bank of Atlanta says home prices, for the most part, are only marginally impacted by distressed homes.

In fact, the time period when property values are most affected by a nearby distressed asset is when the borrower is still in the property, but seriously delinquent, according to Kristopher Gerardi, Eric Rosenblatt, Paul S. Willen, and Vincent W. Yao of the Atlanta Fed Bank.

The research report attributes this anomaly to the fact that delinquent borrowers are struggling with cash flow and less likely to keep up with property maintenance. Delinquent borrowers also hold their homes at arms length when they feel a foreclosure is imminent, so they stop investing in properties.

But this pessimism toward maintenance changes when the bank later steps in or when the home is sold off again to a new owner who invests in the property.

“We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, 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,” the report said.

Overall, the research findings suggest foreclosures and delinquencies don’t have as much of an impact on neighboring home prices as many would expect.

When looking at just seriously delinquent loans and REOs, Fed Bank of Atlanta researchers found that homes within 0.10 miles of a distressed property only experience a 0.5% to 1% value decline on average.

The actual value loss is “likely to go unnoticed by the typical seller who does not have many distressed homeowners living nearby,” the researchers concluded.

“Perhaps the most important conclusion that one should take from this analysis is that the effects of foreclosure and distressed property in general on the prices of neighboring homes are fairly small,” the team asserted in their final report.

Furthermore, the study found the vast majority of properties sell without any distressed properties nearby, so only a small fraction of the recent price declines can be tied exclusively to foreclosures.

A home’s proximity to a distressed asset also plays a role in preserving or killing price values.

A seriously delinquent homeowner can cause prices on properties within 0.10 miles to fall by at least 1.2%, but that price decline falls to 0.8% when the home is 0.10 to 0.25 miles away from the foreclosure, the Atlanta Fed Bank concluded.

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