Since the housing market collapse, banks have repossessed large numbers of homes. These REO or real estate owned properties are often vacant and rundown and can lower the values of nearby residences. While research confirms this spillover effect of REOs on other properties, few studies have evaluated its relative magnitude in different neighborhoods. DeVoe Moore Eminent Scholar Keith Ihlanfeldt and Tom Mayock of the Office of the Comptroller of the Currency contribute to this area of inquiry with “The Variance in Foreclosure Spillovers across Neighborhood Types,” an article detailing their analysis of the REO effect in neighborhoods of different income levels and racial composition.
From the still-formative research literature, Ihlanfeldt and Mayock cited two studies which found REOs exert a stronger effect on prices of surrounding homes in lower-income neighborhoods than they do in higher-income neighborhoods, and a third study which found no differences in the effect between low- and high-density neighborhoods. However, they observed that, if the REO spillover effect is variable, plausible arguments can be made for each of two opposite outcomes: REOs may have a larger effect in disadvantaged neighborhoods where they can worsen housing and socioeconomic shortcomings already present, or they may have larger spillovers in affluent neighborhoods where their deficiencies stand out more.
For their study, Ihlanfeldt and Mayock reviewed the sales transactions of single-family homes in the South Florida metropolitan area between 1999 and 2011. Using census block group data, they characterized neighborhoods as lower- or higher-income based on their median household incomes, and as white, African-American or Hispanic based on the predominant ethnicity of their residents. The researchers then estimated REO spillovers in neighborhoods distinguished on these two factors, while controlling for other variables that can affect housing price.
Contrary to the prior evidence, their overall results show REOs exhibit a stronger spillover effect on home sale prices in higher-income neighborhoods than in lower-income neighborhoods. With regard to race, the REO effect is stronger in white neighborhoods compared to black or Hispanic neighborhoods. Ihlanfeldt and Mayock next looked at neighborhood income (now categorized into three levels) and race in combination. In neighborhoods of color the REO effect increases in magnitude with each increase in income level, whereas in white neighborhoods it increases with progression from the low- to middle-income level but unexpectedly decreases from the middle- to high-income level. Also surprising, REO spillovers are not found at the low-income level of black and Hispanic neighborhoods. Ihlanfeldt and Mayock offer possible explanations for their findings, which would suggest government intervention be directed not only to low-income areas where REOs are concentrated but also to high-income areas where their effect is greater.
A thorough discussion of this study and its policy implications was published earlier this year in Public Finance Review and can be viewed at http://pfr.sagepub.com/content/44/1/80.full.pdf+html.