The collapse of the housing market led to an increase in the number of foreclosed residences, with ownership of many reverting to the banks. These are referred to as REO (real estate owned) properties. Recent research concludes the presence of REOs in a neighborhood can lower the property values of nearby homes, but these studies do not consider whether this effect lingers after the REOs are sold. DeVoe Moore Eminent Scholar Keith Ihlanfeldt and Tom Mayock, economist at the Office of the Comptroller of the Currency (and former DMC fellowship recipient), have explored this issue and report their findings in an article titled “The Impact of REO Sales on Neighborhoods and Their Residents.”
The poor maintenance and disrepair typical of REOs may account for their detrimental effect on the values of surrounding residences. Ihlanfeldt and Mayock hypothesized an REO property will continue to exert this effect even after it is sold if the buyer is an investor but not if the buyer will reside in the home. Their reasoning is that an investor is more likely to convert an REO to a rental unit than to “flip” or rehab and resell it, and an investor with a rental property is less motivated than an owner-occupant to provide for needed upkeep and repairs. However, the researchers also hypothesized the negative effect of an REO bought by an investor will lessen over time.
To test their hypotheses, Ihlanfeldt and Mayock examined data on the sales of single-family homes in ten Florida counties since the housing bust. They estimated the effects on housing price of an array of variables, including structural characteristics of the home and external factors such as changes in quality of neighborhood schools, employment trends and seasonality of the real estate market. Their variables of interest, though, were proximity to four types of housing: ex-REOs owned by investors, ex-REOs occupied by owners, current REOs, and single-family rentals not previously in REO status.
Results were as expected. In general, owner-occupied ex-REOs appear not to influence property values of nearby residences. Investor-owned ex-REOs, current REOs, and non-REO rentals, on the other hand, lower the values of neighboring properties. Additionally, the effect of investor-owned REOs tends to decrease over time until it is no greater than the effect exhibited by non-REO rentals. Ihlanfeldt and Mayock suggest that investors may take longer than owner-occupants to catch up on the repairs needed for the REOs they purchase, but do eventually remedy the neglect. They also remark on another possible consequence of REO sales – opening up housing opportunities in better neighborhoods – as a topic for future study.
For a full discussion of the background to this research, the methodology used, and detailed results, the article can be found in the Journal of Real Estate Finance and Economics at http://link.springer.com/article/10.1007/s11146-014-9465-0. It is one of the papers presented at a 2013 DeVoe Moore Center Critical Issues Symposium on housing market issues.