Do Nearby Foreclosures Affect Home Values?

RICHMOND, Va. – Question: We recently had someone in our neighborhood lose a home to foreclosure. We feel terribly for the owners. With a nearby foreclosure can we expect home prices in the neighborhood to fall?

Answer : During the mortgage meltdown, the period between 2007 and 2010, millions of foreclosure notices went out and many people lost their homes. Such foreclosures were largely the result of widely marketed toxic mortgages that were at first enticing but later became impossible for many borrowers to repay.

Home prices were forced down during the mortgage meltdown because many properties were available at discount prices. Today the situation is different for several reasons.

First, there are few distressed properties because of the foreclosure and eviction bans in place during the worst of the Covid pandemic.

Second, borrowers are generally in good financial shape. One reason is that the Dodd-Frank legislation requires lenders to verify the ability of borrowers to repay. The result is that most of today’s mortgage borrowers are able to deal with short-term financial declines.

Third, the huge price run-up seen in the past few years means many owners have significant equity: They can typically sell the house for more than the value of the outstanding debt and leave closing with a check. The value of U.S. homes rose $7.5 trillion between June 2023 and June 2021.

Perhaps more importantly, lenders have figured out that forbearance – if possible – is a better idea than foreclosure. Examples of forbearance include:

• Repayment plans to make up for missed payments over time, maybe an extra X dollars per month
• Reinstatement – lump sum repayments to bring accounts current
• Loan deferrals that move missed payments to the back of the mortgage term
• Loan modifications – a change in terms for the remainder of the mortgage

As to the impact of a foreclosure near your home, Francois (Frank) K. Gregoire, the four-time chairman of the Florida Real Estate Appraisal Board and an appraiser based in St. Petersburg, points out that there is a difference between an “arms-length” transaction and a “forced” sale.

“A forced sale,” said Gregoire, “one in which either party is acting under compulsion, is not indicative of an arm’s length transaction. It would not be a parable sale.”

In other words, a foreclosure is not a “fair sale.” As Fannie Mae explains, a foreclosure “usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.”

So, generally, if one house in a neighborhood is lost to foreclosure, it should not result in falling home prices.

For those who face financial hurdles, contact loan servicers (the folks who collect monthly mortgage payments) to see what help is available. Do this as quickly as possible once problems arise and ask about forbearance options.

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