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The Ripple Effect of Foreclosures

A report by Zillow explains how the effects of the Great Recession were not just twofold but deeply profound—and also reveals how the crisis served to benefit those who bought foreclosed homes during that time.

According to the report, nearly half (45.4 percent) of all homes foreclosed in the wake of the subprime mortgage crisis were valued in the lowest third of the U.S. housing market, contrasted with just 16.9 percent of homes valued in the top-third. Those left to reap the profits, then, were those not locked out of the market who could also afford to buy up these underwater homes.

Not only did those Americans not foreclosed on see an overall increase on average in their wealth, but they were also presented with an incredible opportunity. Since the homes that foreclosed earliest saw the sharpest increase in their value, those who bought into the market quickest at that time stood to gain the most. The report revealed that throughout the recovery, such homes grew in value 1.6 times faster than the average U.S. home.

The report said that nationwide previously foreclosed homes lost 42.6 percent of their value during the housing bust, but have since earned it all back and some. “Today, the median, previously foreclosed home is worth 0.1 percent more than it was during its pre-recession peak, a testament to the precipitous pace of home value growth over the past six years,” the report revealed. “Over the same time, the typical U.S. home value fell 25.9 percent – a much more moderate decline – and is worth 8.1 percent more today than it was before the recession.”

Of course, the effects of these foreclosures are still felt today—both for those at the top and those at the bottom—with a total 7 percent rise in rentals for single-family homes since the recovery began. The boom and bubble preceding the bust saw many low-income Americans enter the housing market when credit was easy to obtain, and for several years those buying entry-level homes had reason to believe their fortunes were improving. After all, their home values were rising and with it their overall share of wealth.

But these low-income homeowners were far more likely to have most, if not all, of their investments tied up in their mortgages—a fact that remains true of low-income homeowners today, the report indicated. Conversely, the wealthiest Americans had only about a quarter of their wealth on average tied up in their homes, something which protected them from dropping values. So when the bust occurred and home values tanked, entry-level homes foreclosed in much larger numbers.

To read the full report, click here.  

About Author: Staff Writer


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