Sold foreclosed homes sit empty longer; Study indicates policy needs to change

CLEVELAND - In Cuyahoga County, homes that were sold after foreclosure have high vacancy rates two to five years after they are sold. A study by the Federal Reserve Bank of Cleveland found that foreclosed homes have much higher vacancy rates after auction than other homes.

The study, done by Stephan Whitaker, used data from 85,000 properties and 130,000 sales transactions from 2006 to 2010.

Whitaker found that homes sold through ordinary transactions are occupied by their new owners within a few months while vacancies among the foreclosed home increase in the same time period.

Study excerpt:
"The occupancy of foreclosed home climbs between seven and 15 months after the sheriff’s sale, but it plateaus after that. 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 includes charts that show a dramatic difference in vacancy rates of foreclosed home and others.

Foreclosed homes have an impact on surrounding homes. The study points out that those homes add another house to the market and lower the prices of other homes sold in the area. The lower value limits the homeowner’s ability to “extract equity for expenses such as home improvements, starting a business, college tuition, or retirement.”

Cited in the study is another study that concluded that a distressed property within 300 feet of a home sale will lower the sale price by 1 percent.

Whitaker’s study concludes by suggesting that policymakers may want to address the foreclosure process in at least two ways:

"First, keeping homes out of foreclosure would avoid creating REO [real estate owned] and other vacancies that seem to linger among previously foreclosed homes.

"Second, for homes that must go through foreclosure, any incentives or changes in administrative procedure that could shorten the time in REO would be helpful. As long as a home in REO status sits vacant, it diminishes the sales prices of all nearby homes on the market. The shorter this time is, the fewer homes will be affected.

"However, as with all complex issues, policymakers need to be mindful of unintended consequences. 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."