Foreclosures dent home values in the neighborhood – MIT Study

It is common knowledge if a nearby house of yours falls into foreclosure tragedy; invariably it reduces the market value of your home as well, from the home buyer’s point of view. More so, if your neighborhood is one of those hard-hit by many foreclosure properties, the drop down of value for all housing properties is considerable as a whole. But how much of this effect is and in what percentage? American Economic Review has conducted a study recently to answer these doubts, and the results are yet to be published in full.

The above mentioned study is based on the analysis of 1.80 million home sales, which took place in Massachusetts from the year 1987 to 2009; and after publication will open up more researches, on subjects related with foreclosure crisis. According to the results of this study – on an average a foreclosure reduces the value of a home by 27 percent.

This is surprisingly a large discount, considering the sale of a home under many circumstances of distress like – death of the owner, declaration of bankruptcy, financial hardships and so on. If a home is situated within 250 feet from a foreclosed property, the value of that home drops by 1 percent, in the first place.

Supposing a home is sold by the legal heirs after the demise of the owner, the study found that the price of that particular property reduces on an average of 5 to 7 percent minimum. In case the home owner declares bankruptcy, the market value of that property invariably falls by 3 percent minimum.

Economists and Industry experts are of the view that the fact a property sheds its value by foreclosure is not surprising; the amount of discount it causes in the sale price is really a matter of surprise.

The study reports the major factor for drop in value of a foreclosed property is its existing condition, at the time of the sale. Logically, it is but natural that a distressed home owner may not be sound financially, for the upkeep of the home without repairs.

In practice we have seen the foreclosure properties listed for sale through public auction are offered for sale in “as is” condition, thereby hinting the seller is not guaranteeing about the status of the property under sale.

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