Federal Reserve Bank of Cleveland | Foreclosures May Permanently Scar Homes
Foreclosure-Related Vacancy Rates
The national foreclosure crisis has caused there to be millions more vacancies in our housing stock than before. Vacant homes lower their community’s property values and quality of life. Neighbors and public officials know foreclosed homes sit empty for months, but precise measures of foreclosure-related vacancy are rare. Using data from Cuyahoga County, Ohio, I trace the rise and fall in the vacancy rates of homes during the 18 months following their foreclosure. Ominously, the data suggest that foreclosure may permanently scar some homes. Foreclosed homes still have higher vacancy rates than neighboring houses two to five years after a sheriff’s sale.
As the housing market staggers into its fifth year of decline, the issues of foreclosure and vacancy continue to demand our attention. In 2010, 1.85 million consumers nationwide received a new foreclosure notice, compared to between 600,000 and 800,000 in the “normal” times of a decade earlier.
Almost all foreclosed homes are at least temporarily vacant; as long as they remain so, they impact the home values and quality of life in their neighborhoods. What if the vacancy associated with foreclosure lingers on long after the foreclosure? Could the rise in foreclosures translate into both a short- and a long-term increase in vacancy?
Using a unique data set covering Cuyahoga County, Ohio, I explore whether foreclosed homes are reoccupied at rates similar to those of other recently sold homes. The data reveal that foreclosed homes go through more than a year of very high vacancy rates following the auction and are substantially more likely to be vacant up to 60 months after the foreclosure.
The distribution of foreclosures is heavily weighted toward high-poverty areas, and homes in these areas are more likely to be vacant long after they are sold. However, even compared to homes in census tracts with similar poverty levels, foreclosed homes show higher vacancy rates than others years after the auction.
The Impact of Vacancy
Foreclosure and the vacancy it causes are a concern for policymakers because a foreclosure’s impact extends to hundreds of people in the neighboring community. A foreclosure adds one more home to the supply on the market and so depresses the prices of all homes sold in the area. This leads to smaller gains or larger losses for people who must sell in the current market and devalues the largest asset most households own—their house. This lower value limits homeowners’ ability to extract equity for expenses such as home improvements, starting a business, college tuition, or retirement. Owners of depreciated homes may constrain their spending to try to make up for the lost wealth, and this can act as a drag on economic growth.
A vacant home can also lower property values, even if it is not for sale. Vacant homes are often part of a “shadow inventory” because the owners intend to put them on the market when demand recovers. Every month, some of these owners will decide that the costs of holding an empty house outweigh the benefits of waiting. In locations with a lot of shadow inventory in addition to the active inventory, there is downward pressure on home prices.
Moreover, the exterior of a vacant home is usually less likely to be well-maintained than an occupied one. This detracts from the vitality of the neighborhood and the prices buyers are willing to pay for nearby homes. In high-crime areas, unoccupied homes are often broken into, stripped of valuable metals, and vandalized. In some cases, criminals move into the homes and run illegal operations from them.
As foreclosures have increased in recent years, so have the studies that estimate their economic impact. It is not surprising that economists have been able to detect a distinct difference in prices for homes near a recently foreclosed property. John Harding, Eric Rosenblatt, and Vincent Yao used data from seven metro areas to estimate the impact of a foreclosure on the sale prices of nearby homes. Their results suggest that a distressed property within 300 feet of a home sale will lower the sale price by 1 percent. John Campbell, Stefano Giglio, and Parag Pathak report a similar finding in their study, which analyzes two decades of sales records from Massachusetts. They observe that a foreclosure within 264 feet reduced the sale price of a house by 1 percent. These two studies build on a list of similar published findings.
In articles on foreclosure, authors usually note that foreclosures lead to vacancies, which can depress sales prices through the supply and disamenity channels discussed above. A study by the Federal Reserve Bank of Cleveland’s Dan Hartley estimates the strength of the two channels separately. He finds that foreclosures in high-vacancy neighborhoods depressed prices by 2 percent via a disamenity effect, whereas foreclosures in low-vacancy neighborhoods depressed prices by 1.6 percent via a supply effect.
Parcel-level foreclosure data are widely available because the process must be recorded in court and property records. Data on the vacancy of individual homes are more difficult to obtain, so only one study so far has estimated the impact of vacant homes on nearby property values. Brian Mikelbank used data, collected by the City of Columbus, which identified vacant and abandoned homes along with foreclosures. He estimated that a vacant home reduced the sale price of nearby homes by 3.6 percent in the year following the city’s survey. Controlling for vacancies reduced the estimated impact of the foreclosures, reflecting the strong relationship between the two. Anecdotal information and aggregate figures suggest that foreclosures cause additional vacancies, but the relationship needs further study using data on individual properties.
A Study of One Ohio County
To study whether foreclosure increases the length of time homes stay vacant, a set of data have to be constructed. I focused on Cuyahoga County, a populous counties hit hard by the foreclosure crisis. I used county sales records from 2006 to 2010, and for vacancy data, I used the U.S. Postal Service’s address database. Homes are recorded as vacant in the USPS database if they have been vacant for at least 90 days. Actual vacancy rates are likely higher because there are many short-term vacancies that are not captured in this data.
The vacancy observations used in this analysis were all made in 2010. Figures that represent how many homes are vacant four or five years after a sale are calculated by taking homes that were sold in 2006 and observing whether they were vacant in 2010. Likewise, the vacancy rates calculated for the months close to a sale are based on sales in 2009 and 2010. The housing units are included in every month-difference group where it is possible to observe both sales and vacancies. Altogether, the calculations involve 85,000 properties and 130,000 sales transactions. I considered a sale a foreclosure if the transaction is recorded as a sheriff’s sale.1
As to the question of whether foreclosed homes are more likely to be vacant after the sale, the simplest answer is yes. Six to nine months before the sale, the occupancy rates of both types of homes are essentially the same (figure 1). By the date of the sale, the homes in foreclosure are already more likely to be in an extended period of vacancy. After the sale, there is a sharp contrast: Homes sold through ordinary transactions are occupied by their new owners within a few months. Vacancies among the foreclosed homes increase during the same period.
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