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Study Finds Foreclosures Lead to Long-Term Vacancies

The rise in foreclosures in recent years may lead to long-term vacancies, further exacerbating housing prices and the market as a whole, according to Stephan Whitaker, a Cleveland Federal Reserve Bank researcher.

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In a recent study, Whitaker determined a strong correlation between foreclosures and vacancy rates.

Whitaker tracked vacancy rates for 18 months following foreclosures in the Cuyahoga County, Ohio, using data from the U.S. Postal Service to determine vacancies.

“Ominously, the data suggest that foreclosure may permanently scar some homes,” Whitaker writes.

He continues, “Foreclosed homes still have higher vacancy rates than neighboring houses two to five years after a sheriff’s sale.”

Almost all foreclosed homes are at least temporarily vacant, according to the study. However, Whitaker found that foreclosed homes experience high vacancy rates for one year following foreclosure and are more likely to be vacant up to 60 months later than non-foreclosed homes.

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“In any month from two to five years after the sale, foreclosed homes are two to four times more likely to be vacant than those sold through ordinary transactions,” the study notes.

Foreclosures are more prevalent among older properties located in areas with high poverty levels, and vacancies are more common for these homes regardless of broader market trends. However, Whitaker found that even in neighborhoods with little poverty, foreclosed homes had high vacancy rates two to four years after foreclosure in comparison with homes sold through other means.

Whitaker points to two previous studies to illustrate the impact of foreclosures and vacancies on markets.

A study by another Cleveland Fed researcher, Dan Hartley, found that foreclosures in neighborhoods with high levels of vacancies pushed prices down 2 percent. In neighborhoods with lower vacancy rates, foreclosures pushed prices 1.6 percent lower.

Another study examined the effect vacancies have on prices in Columbus, Ohio, and found that vacancies depressed prices 3.6 percent.

Based on his findings, Whitaker advises policymakers to address the issue of foreclosures and vacancies. He believes the first area of focus should be on keeping homes out of foreclosure.

When foreclosure cannot be avoided, Whitaker suggests implementing incentives or policy changes aimed at shortening the time a property spends as an REO.

“However, as with all complex issues, policymakers need to be mindful of unintended consequences,” Whitaker warns. “For example, forcing banks to decrease the length of foreclosed homes’ time on the market could cause banks to lower sales prices, making the problem worse.”

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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