I recently read an article at the National Bureau of Economic Research (NBER) which attempted to link foreclosures and home values. The statistics cited in the article concluded that foreclosures are not affecting home values very much and that there are only a dozen or so states with enough foreclosures to induce price drops of 6 percent or more.
The article made it seem as if this was an insignificant number. I disagree that a 6 percent drop in prices in a dozen states due to foreclosures is insignificant, but, I do agree with the premise of the article to a degree – I was unable to find any real loss of value on the whole that was directly related to foreclosures.
I’m also always skeptical of “national” studies in which home values are cited because they are almost always off. As an example, I recently read an article in Forbes which ranked the most expensive ZIP codes around the country. I found the ZIP code here in Atlanta that was in the report to be off by about 30% according to my local MLS – I’m sure it’s more accurate than their numbers. With that in mind, I thought it might be worthwhile to look at a local level and see if I could determine if foreclosures are affecting local home values. I was unable to see that there was a discernable price drop, be it direct or indirect, of home values due to foreclosures.
The methodology I used was to take an area of Atlanta and looked at sales data quarter by quarter with and then without the foreclosures as a baseline from Q1 and Q2 of 2007 and 2008. There was no discernable difference in home values, but, there really weren’t enough closed foreclosures to make much of a difference anyway. That said, what I did find, did not support the idea that foreclosures are bringing down the rest of the neighborhood. So, the next thing that I did was to seek an area within the city with a high enough number of foreclosures to compare neighborhoods. Again, there is no real way to track something like this accurately and on a large enough scale to say for sure and really, not nearly enough foreclosures which by itself indicates that they are not depreciating the value of homes. So, I changed directions and spoke with some other people who really matter in this – an appraiser and an underwriter.
From an underwriter’s perspective, they will do everything possible to eliminate all foreclosures as comparables because technically they are distress sales and aren’t considered to be fair market value; they will leave the subdivision if necessary. What foreclosures are doing from this underwriter’s perspective, are in fact capping prices and not allowing them to increase even in areas where home prices are otherwise strong.
The appraiser I spoke with said the same thing as the underwriter – foreclosures are not devaluing prices. So what gives? It seems to me that for all the talk of how foreclosures are hurting values, nothing seems to indicate that they are. What is hurting values is something far less complicated; supply and demand. Sure, there will be some places where an abundance of foreclosures may be the only recent sales and in those areas, prices may come down. That is because the area was overpriced to begin with if there are no regular sales, not because there are only foreclosures.
So my conclusion is that sellers need not fear that they are losing value because of a link between foreclosures and home values, they need to fear the high supply of inventory.