Report: Foreclosures batter R.I. property values

If you own a home, you do not want your neighbor’s lender to foreclose on him. Such was the message last week from HousingWorks RI, which said the 4,738 foreclosures during the past two years drove down Rhode Island’s property values to the tune of $5.6 billion.
“Clearly it’s a large number and I think it has some important repercussions for the state,” HousingWorks RI Executive Director Nellie Gorbea said.
The evaporation of wealth on paper comes with tangible consequences. Most notably, homeowners looking to sell are likely to realize lower prices than hoped, though foreclosures’ typically negative impact on housing prices may differ from one neighborhood, and community, to the next.
Lower property values also make home-equity loans harder to come by and, as discretionary income dries up, the economy remains stuck in neutral.
“The economy was built on debt and the run up of the housing market,” University of Rhode Island College of Business Administration Dean Mark Higgins said. “So it is not surprising that when it crashes all the air is taken out the balloon.”
Citing a 2009 report co-authored by professors from Harvard University and the Massachusetts Institute of Technology, HousingWorks said homes within a 300-foot range of a foreclosed home lose, on average, about 1 percent of their value. Applying that rule to Rhode Island, HousingWorks calculated a $5.6 billion loss during the last two years.
Foreclosures predominately struck the state’s urban core but touched every community in the state. Providence led the way, with 1,213 foreclosures between January 2009 and December 2010. Next came Warwick with 556 foreclosures, Pawtucket with 429 and Cranston with 315; Block Island recorded the fewest: just two. Foreclosures in Rhode Island did drop 34 percent in 2010 compared with the year before. But the number of homeowners behind on their mortgage payments or in the foreclosure process increased from 8.59 percent in the first quarter of 2009 to 10 percent in the last quarter of 2010, according to HousingWorks’ analysis of data from the Mortgage Bankers Association.
Higgins worries that the foreclosure crisis is far from over. And he has little doubt that the number of foreclosures is hurting the ability of the wider economy to recover.
But he and others question the extent to which foreclosures drive down property values. Higgins said mathematical models of how foreclosures affect nearby property values fail to take into account important details of nearby houses that vary from block to block.
Joe Magdziarz, president of the Appraisal Institute, said the models’ failure to consider a situation where a neighbor of a foreclosed property may also be a neighbor of a new parking lot.
Nonetheless, the sheer number of foreclosures nationwide is throwing a monkey wrench into trying to define home values, said Magdziarz, who is an appraiser in Illinois.
Foreclosures do not involve a willing seller, and the bank may sell the property at a lower price than a homeowner would. So that puts people appraising a nearby home in a dilemma: factor in the foreclosure or ignore it.
Ideally, Magdziarz said, appraisers take a middle route and spend time to understand the details of the foreclosure and weigh its influence on prices appropriately. But not everyone is willing to wait for appraisers to develop such a detailed estimate. Rushed estimates, Magdziarz said, then lead to a host of problems. Deals collapse over disputes on price and residents face tax assessments – and by extension tax bills – that may make little sense.
“Unless you understand who the buyer and seller are and their motivations, you can come up with a very inappropriate number,” Magdziarz said.
The last few years have already been trying times for assessors as they faced a real estate market where prices ballooned for no apparent reason and then fell almost overnight. Add in a stubbornly high unemployment rate and foreclosures and the complexities grow.
The gyrating market has also delivered a wild ride for some homeowners, as Pawtucket Tax Assessor David Quinn knows all too well.
Single-family home values dropped by an average of 19 percent when the city completed its 2008 revaluation. Multifamily home values fell by about half.
Pawtucket, however, still needed the same amount of money to run City Hall and its schools and raised the mill rate. But the new values meant single-family homeowners shouldered more of the burden – taxes for many rose between $700 and $900 a year. About 1,500 people appealed their assessments.
“It was awful,” Quinn said.
But he attributed the shift more to wider economic forces than foreclosures in his city. And as the city prepares to undertake a revaluation this year, he expects the 429 homes that have been foreclosed on during the last two years to make little difference. For one, they comprise only about 2 percent of the city’s properties. And they are also scattered, limiting their impact.
“I don’t expect Armageddon,” Quinn said. •