Report: Foreclosures Reduce Home Values by 27%


Original Post Date: July 26, 2010

By: Nick Timiraos

On average, a foreclosure reduces the value of a house by 27%, says a new paper from an economist at the Massachusetts Institute of Technology and researchers at Harvard University.

In the study, which is due for publication in the American Economic Review, MIT economist Parag Pathak and Harvard researchers John Y. Campbell and Stefano Giglio conclude that a foreclosure puts a much bigger dent in a home’s value, compared to a forced sale as a result of bankruptcy or the death of the owner.

Mr. Pathak says he’s not surprised that there’s a discount due to foreclosure, but says, “It is surprising that it’s so large,” according to a press release. The paper uses data on house transactions in the state of Massachusetts over the last 20 years.

A forced sale as a result of the owner’s death chips only 5-7% off the price of the home, and a bankruptcy filing drops the home value by an average 3%, the researchers found.

The presence of a foreclosed home in a neighborhood, which can often become a blight on the community, drops the value of all homes within 250 feet by 1%, on average.

Foreclosure discounts are larger for low-priced properties in low-priced neighborhoods, the authors conclude, “which suggests that foreclosing mortgage lenders face fixed costs of homeownership, probably related to vandalism, that induce them to accept absolute discounts that are proportionally larger for low-priced houses.”