Mortgage foreclosure pulls home's price down 27%, says MIT study

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Services for Real Estate Pros

Las Vegas, NV houseWhen major upheaval pummels a real estate market, it as a rule leads to home value depreciation. That's the easy part. The hard part is to try to put an actual number on the price reversal. A team led by the Massachusetts Institute of Technology, or more commonly MIT, recently conducted some deep research to determine how much a home's value deteriorates because of a foreclosure. The current housing and mortgage meltdown obviously got them thinking and they decided to dig up some realistic answers.

The group looked at 1.8 million real estate sales in Massachusetts spanning from 1987 all the way to 2009, which then includes data from the present housing collapse. After spending considerable time shifting through the massive amount of information in front of them they at last were comfortable in concluding that - on average - a foreclosure slices 27% off a home's value. That is a high number, and subject to some serious debate.

The same MIT team also studied other forced sales and their effect on real estate values. When the homeowner goes into bankruptcy, the property's value drops 3%. And when a homeowner death brings about a sale, the price sinks on average 5-7%. Clearly, a mortgage foreclosure has a much more profound impact on the underlying value than the other two.

The main reason to the wide separation between the different forced sales is the condition of the home. Homeowners sliding inevitably toward foreclosure will spend the money they still have on everyday necessities and not on property upkeep. That's stage one. Stage two is when mortgage lenders foreclose and then generally neglect their REOs - real estate owned - allowing properties to fall into further disrepair. There clearly are two forces here steadily gnawing on the property's value. In the other two instances neither one is prominently present.

As the MIT research proves, it would be to the mortgage providers' benefit to maintain their REOs to attract top dollar when selling. 27% shortfall should make them think again about proper maintenance. But that often is not the case in this current real estate downturn.

 

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Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

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Rainmaker
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Paul Francis
Prudential Americana Group - REALTORS - Las Vegas, NV
Las Vegas Real Estate - Summerlin Homes - 702.592.

Hello Esko,

I remember this study... It's kind of a vague study with what is currently taking place. Today's foreclosures (in Las Vegas anyways) have little effect on value when over 40% of the sales for the past year have been REO properties.

In fact... today when I pull numbers and see a high sale... it's generally from a non distressed/regular seller (non short sale or REO sale) and more often then not.... it is because a buyer (and their agent) got tired of dealing with banks for REO or Short sale properties.

Kind of like new homes in Las Vegas having a median sales price of over $50,000 more then resale homes. I hear agents saying it over and over... I'm only going to deal with new home/condo inventory because I'm tired of having to deal with the banks...

Regardless... using a time period from 1987 to today is kind of irrelevant considering the big picture of what has been taking place since 2007.

Aug 23, 2010 03:17 AM #1
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Paul,

This study gives us a general idea that foreclosures do hurt values rather hard.

Aug 23, 2010 09:56 PM #2
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Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

I agree there is a hierarchy of sale prices but to convince a homeowner that there are no comparables to list his standard sale home and support the high price is insane these days!

Aug 24, 2010 08:33 PM #3
Rainmaker
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Phil Leng
Keller Williams Eastside Market Center - Kirkland, WA
Phil Leng Team - Residential Real Estate Experts &

Interesting information.

I don't know if the actual number is correct in our area, but there is clearly a loss in price if it is reo.

Phil

Aug 30, 2010 04:46 AM #4
Rainmaker
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Esko Kiuru
Bethesda, MD

Renee,

Pricing in Vegas today can be a chore, no doubt.

Sep 04, 2010 08:00 PM #5
Rainmaker
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Esko Kiuru
Bethesda, MD

Phil,

At first look, that 27% figure appears rather high. Who knows?

Sep 04, 2010 08:01 PM #6
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Dec 29, 2011 05:18 AM #7
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