The hidden cost of foreclosures in Chicago neighborhoods; Study finds distressed properties impact home prices

FOR RELEASE: July 22, 2014

For Further Information Contact: Stephanie Sievers, 217-529-2600

The hidden cost of foreclosures in Chicago neighborhoods; Study finds distressed properties impact home prices 

SPRINGFIELD, Ill. — Chicago neighborhoods hard hit by foreclosures face a second threat, that of weaker selling prices for nearby homes, according to research by the Regional Economic Applications Laboratory (REAL) at the University of Illinois.

The problem: Foreclosures in the Chicago area spiked after the 2006-2007 housing bubble as the housing market foundered during the recession. That left many Chicago neighborhoods dotted with foreclosed properties, some of which were vacant or in disrepair.

Now that Illinois' foreclosure outlook has steadily improved and the numbers of distressed homes could return to pre-recession levels as early as this fall, REAL analyzed the data to establish the hidden impacts of the foreclosure crisis. 

The data: REAL looked at five years of data (2008-2012) to determine the impact foreclosures were having on neighboring properties. The research was able to put a dollar figure to having a foreclosed property in close proximity to a property. The REAL study found in areas with foreclosures, prices for non-distressed properties could decline by thousands of dollars.

The findings:

  • Foreclosures "contaminated" neighborhoods by dampening home prices. Distressed properties have a higher incidence of being poorly maintained or vacant, factors which detract from the neighborhood's overall appearance. Additionally, areas with high incidences of foreclosures create a surge of property on the market, a factor which can further weaken prices,
  • Having one to two foreclosed properties within a tenth of a mile of a home can reduce its price by $6,535, based on a home worth $150,000. (See Figure 1: 0-0.1 mile nearby)
  • Additional foreclosures in close proximity to a home further reduce the price, although not at as steep a rate. In a particularly hard hit area with more than 10 nearby foreclosures, each foreclosure reduced property values by $2,246 accumulating to a total discount of $28,000 according to REAL.  (See Figure 1 and Figure 2: 0-0.1 mile nearby)

The impact: Those in areas with high incidences of foreclosure could see lower prices for their homes due to a surge in properties on the market through foreclosure. Some of these properties may not be well maintained, and the overall appearance or perception of a neighborhood with distressed properties adds to downward pricing pressure.

Compounding this issue is an overall decrease in home value brought about by the financial crisis which left some homeowners "underwater," or owing more than they could obtain for their house in the real estate market. If those houses were located in areas with nearby foreclosures, it could take even longer for these homeowners to attain enough equity to sell. 

The REAL study shows that foreclosures do impact neighborhood home prices, but it is important to note that the foreclosure crisis has eased and as more of the distressed properties come off the market, Chicago's inventory levels, and overall foreclosure outlook, are moving in the right direction. REAL provides forecasts for the Illinois Association of REALTORS®, and sees foreclosures returning to pre-recession levels by this fall.
 

MEDIA ONLY: Economist Dr. Geoffrey J.D. Hewings will be available for media interviews and to answer questions about the REAL study.