Foreclosure Effect on Home Prices Is Small According to Economists

By
Real Estate Agent with Coldwell Banker Residential Brokerage - ABR - SRES

Despite a report Friday from the Mortgage Bankers Association (MBA) that U.S. foreclosures hit a record high in the second quarter of this year, it doesn’t necessarily translate into big declines in home prices.

Reporting in a new and first-of-its-kind study from the National Bureau of Economic Research, The Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoil, a trio of economists note:

“Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices.”

The authors’ model incorporated MBA foreclosure and OFHEO* home price data from 1981 to 2007 and used home foreclosure forecasts for 2008 and 2009 from Economy.com.  The model included data on unemployment, building permits and existing home sales.  The authors, Charles Calomiris of Columbia University,  and Stanley Longhofer and William Miles of Wichita State University, said the study was the first to estimate the effect of foreclosures on home prices for all of the U.S.

Even under “extreme” foreclosure shock scenario, with foreclosures up 75% compared to the baseline in 2008 and 2009, U.S. home prices may decline only about 5.5% between the second quarter of 2007 and the end of  2009 the authors estimated.

The authors emphasize that house-price declines vary across states and argue that headlines pointing to extreme circumstances in a few states can be misleading about the United States as a whole. Despite increased foreclosure rates throughout the country, only 12 states are projected to see foreclosure-induced price declines of 6 percent or more through 2009, led by Nevada, Florida, California, and Arizona.

“This suggests that home prices are quite sticky, and that fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.”

They go on to say, “We conclude that a reasonable estimate of the future path of U.S. housing market prices is that they will remain essentially flat, on average, for the next two year notwithstanding the large predicted increase in foreclosures.”

Michael

***Office of Federal Housing Enterprise Oversight

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Michael Bergin

Your Realtor in Alexandria and Northern Virginia - ABR - SRES - Military Relocation

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