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In our December 2006 study, “Losing Ground,” CRL predicts that millions of American households will lose their homes to foreclosures in the subprime mortgage market.1 “Losing Ground” focuses on the direct impact of subprime foreclosures, but it does not attempt to quantify how those foreclosures affect neighboring homes and larger communities. In other words, it does not address the “spillover” effect where foreclosures themselves further depress local housing prices. In this report, we estimate how many homes—including families who are paying their mortgage on time—will suffer a decline in property values because of foreclosures in their neighborhoods. We also estimate the monetary value of these losses in terms of lower property value and a reduced tax base for communities.
When a home goes into foreclosure, the negative effects extend beyond individual families losing their homes to surrounding neighbors and the wider community. Published research by Immergluck and Smith (2006) indicates that a foreclosure on a home lowered the price of other nearby single-family homes, on average, by 0.9 percent. They also reported that the downward pressure on housing prices extended to houses that sold within two years of the foreclosure.
Further, Immergluck and Smith found this negative impact was cumulative; that is, each additional foreclosure on the block lowered values an additional 0.9 percent. The impact was even higher in lower-income neighborhoods, where each foreclosure dropped home values by an average of 1.44 percent.2
For this analysis, CRL used the most conservative estimate of a 0.9 percent home value decline per foreclosure. We also utilize our estimates of projected foreclosures from our “Losing Ground” study that, as described on page 4, also are quite conservative compared to subsequent estimates offered by independent economists and investment banks. Further, our findings understate the total foreclosure “spillover” impact because we only include counties located in Metropolitan Statistical Areas (MSAs). A typical MSA comprises a core urban area with a population of 50,000 or more, together with adjacent communities that are economically or socially linked to that core area. Approximately 76 percent of the U.S. population lives in an MSA.3
We project that, nationally, foreclosures on subprime home loans originated in 2005 and 20064 will have the following impact on the neighborhoods and communities in which they occur:
- 44.5 million neighboring homes will experience devaluation because of subprime foreclosures that take place nearby.
- The total decline in house values and tax base from nearby foreclosures will be $223 billion.
- Homeowners living near foreclosed properties will see their property values decrease $5,000 on average.
These national results are the aggregation of CRL estimates of the foreclosure spillover impact for 56,777 census tracts or similar geographies.5 In each geography assessed, the cost to neighbors is affected by three factors: the number of projected subprime foreclosures, the density of local housing units, and the current value of those homes. (See “Methodology” on page 4 for further details on our analysis.) Our calculations of the lost wealth through reduced property values by neighbors is also a loss of tax base to the larger community. Thus, we use the terms reduction in property values and loss of tax base
interchangeably in this report.
As shown in Chart 1 below, 24 states and 42 counties will experience declines of over $1 billion each in local house prices and tax bases. Appendix 1 outlines CRL estimates of the spillover impact for every state and for all counties located in Metropolitan Statistical Areas.
It is beyond the scope of this research to analyze the spillover impact of subprime foreclosures on African-American and Latino homeowners in particular, but we note that communities of color will be especially harmed, since these communities receive a disproportionate share of subprime home loans.