You drive home from your job and there it is: a sign saying the house next door has been foreclosed on. According to new research out of Harvard and MIT, your own home's value just dropped about 8.7%. Yep, just like that.
The research found that the value of your house drops every time another house in the immediate neighborhood is foreclosed on. The degree to which you are impacted depends on certain circumstances, but in every case, your home's value will fall.
The research found that when nearby foreclosures are a symptom of an overall locally depressed economy -- say, the closing of the factory in a one-factory town -- the impact on your home's value will be felt more deeply. Basically you are in a community without jobs. No jobs equals no income means no one to buy houses.
If the foreclosure was causal -- the direct impact of one isolated person losing a job or falling into financial difficulties -- your home will nevertheless lose value, but less so. The factors that wind up impacting you here are whether the property stands empty and attracts vandals, crime, squatters and/or the lawn becomes unkempt, it becomes a trash dumping ground, etc. Causal impact is something public policy and local governments can deal with directly. And some real estate agents encourage owners of neighboring homes to cut the grass and be vigilant about squatters moving in to the property. It's in your self-interest to keep up the appearance of the neighborhood.
The stakes are clearly high. Each foreclosure within a 1/4 mile radius of your home erodes the value of your property by 1.7%, said John Campbell, an economics professor at Harvard University and one of the study's three authors. The other two researchers were Stefano Giglio and Parag Pathak.
About 1.8 million home values were tracked in the report called "Forced Sales and House Prices," which was updated last month and is expected to be published in the upcoming issue of the American Economic Review, one of the most prestigious journals of scholarship in the field.
The study certainly dovetails with the anecdotal evidence of what's occurred in places like Riverside and San Bernardino Calif., as row after row of homes stand abandoned after foreclosures.
Some good news is coming for about 50,000 struggling homeowners in five more states with high unemployment, as state housing agencies in Ohio, South Carolina, North Carolina, Oregon and Rhode Island can now use money for foreclosure mitigation from the "Hardest Hit Fund" that was announced in March. States had to apply for the aid and the Treasury Department announced that those five states have had their proposals approved. Other states where unemployment exceeded 12% in 2009 are eligible. California, Nevada, Arizona, Florida and Michigan were already approved for $1.5 billion in aid under this program.
Finding Stock Ideas
Learn to do your research and find investments.View Course »