The Negative Impact of Foreclosures

Economic forecasts typically include foreclosure rates and their impact on the housing market. After all, foreclosures affect not only the homeowner but also the entire neighborhood and, consequently, the local government and the economy as a whole.

Foreclosures hurt housing values

Several studies reveal that foreclosures have an adverse effect on local property values, especially during a recession. With every abandoned home, the risks of vandalism, crime, and blight increase. The Center for Responsible Lending estimates that each foreclosure reduces home values in a neighborhood by about $70,000.

Foreclosures hurt local governments

Likewise, foreclosures exert negative impact on local governments due to a decline in tax revenues. Property tax comprises at least two-thirds of the revenues collected by most local governments, which is directly impacted by increase in foreclosures and declines in home prices. Additionally, sales taxes—another major source of revenue for local governments—suffer as a result of the reduction in consumer spending brought about by foreclosures.

Foreclosures hurt the larger economy

Declining home values affect both investment in new construction and consumer spending. The bad news is that these two factors are major drivers of unemployment. In turn, this increase in unemployment leads to a vicious cycle that precipitates subsequent foreclosures as well as further declines in investment and spending.