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A Foreclosure’s Impact on Neighboring Home Values

The Foreclosure Ripple

Yesterday, we covered the coming surge of distressed properties that will enter the market in 2010. Today, we will discuss the impact these properties will have on housing values as we proceed throughout the year.  Questions you should be asking yourself are: 1) Do distressed properties sales impact the value of the surrounding homes, 2) If yes, then to what degree are the surrounding home values impacted, and 3) If home values are affected dramatically by distressed property sales, then what is the REO saturation level of my state?

Let’s begin to answer these questions.

Do distressed properties impact home values in a area?

Distressed properties (foreclosures and short sales), by their nature, are priced at a discounted percentage of the values of houses in the surrounding neighborhood. Here is a graph from First American Core Logic showing that percentage over the last four years:

As we can see, today’s average discount stands at about 35% of the non-distressed sales in the area. These distressed (and discounted) properties are included as comparable sales by bank appraisers to establish value of normal resale properties in a community; therefore homes in a neighborhood experiencing a foreclosure or short sale are significantly impacted.

In another graph from First American Core Logic, we can see that as the percentage of Distressed Sales increased, Prices decreased.

To what degree is value impacted financially by a distressed sale?

The Center for Responsible Lending has been studying this issue for the last several years and has actually devoted a portion of their website to this issue. Below is a screen capture of their site:

As we can see by the bottom-left number, (in my state of New York) values are negatively impacted to the tune of over $37,000!!  [You can check your state by going here.]

This situation will continue in 2010.  In a report released this month, Clear Capital stated that:

U.S. quarter-over-quarter home prices fall for the first time in nine months…REO saturation rates continue to rise.

And it occurred throughout the nation as the following visual of Home Prices from Clear Capital shows:

What does this mean to you?

Distressed properties in your area will have a negative impact on values in the community. There are many foreclosures and short sales coming. It has already started to impact prices. If you are looking to sell, do it before prices fall further.

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