Atlanta Fed Research: New Evidence on Impact of Foreclosures

A recently published Atlanta Fed working paper uncovers some new evidence about the impact of distressed properties on the sale prices of nearby homes. Similar to many other aspects of the housing market, the news is somewhat mixed.

First, the good news—the study, coauthored by Kristopher Gerardi, a financial economist and associate policy adviser at the Atlanta Fed, found that the negative impact of distressed properties on nearby homes is smaller than previously estimated. The negative pricing effect ranged from 0.5 percent to 1 percent per nearby distressed property, the authors write.

Unfortunately, those negative effects start well before the home is foreclosed upon and last until about a year after the bank sells the property to a new homeowner. The authors attribute the sales price declines to underinvestment in distressed properties, which in turn affects the value of nearby homes.

The effect of distressed properties on the surrounding neighborhood may be smaller than expected, but the policy implications are important nonetheless. Indeed, the authors suggest that one way to mitigate the impact of foreclosures may be to minimize the amount of time properties spend in serious delinquency or as lender-owned. Of course, "the first choice is for a foreclosure to be prevented in a way that is good for the investor and the homeowner," Gerardi said. "But if that's not possible, our research suggests that it's good to get the process done in a faster, more humane way to minimize the collateral damage to the neighborhood," he added.