Foreclosed Homes Appreciating Faster than Typical U.S. Home

Mike Sorohan msorohan@mba.org

October 05, 2018

Homes that were foreclosed on during the housing crisis are now rising in value by more than 10 percent annually, more than 3.5 percentage points faster than the typical U.S. home, said Zillow, Seattle.

The Zillow analysis found throughout the recovery, foreclosed homes have gained 74.5 percent in value, compared to about 46 percent for all homes. This means that homes that were foreclosed on during the housing crisis have made far greater gains in value than the typical U.S. home.

But the news is not all good, said Zillow researcher Sara Mikhitarian (https://www.zillow.com/research/housing-bust-wealth-gap-21543/). She noted while the value of foreclosed homes finally passed their pre-recession peak 10 months earlier than all homes, the people who lost their homes to foreclosure during the housing bust have not benefited from these gains. And because nearly half of all homes foreclosed on during the bust were low-end homes, the housing bust widened the gap between the rich and poor in the U.S.

"Less-well-off homeowners that succumbed to foreclosure as the housing market went bust, destroying the value of their largest asset, have very likely missed out on the immense wealth-creation the subsequent housing recovery has enabled," Mikhitarian said. "Meanwhile, those typically wealthier homeowners able to hold on to their homes throughout the worst of the housing bust have likely seen their wealth only increase throughout the subsequent recovery. This difference in fortunes, both literal and figurative, between the most- and least-wealthy homeowners over the past 10-plus years illustrates the ways in which the Great Recession helped widen the already yawning gap between the nation's rich and poor."

The report said during the run-up to the housing crisis, many low-income earners qualified for a mortgage and buy a home. Because of this, the homeownership rate rose from 65 percent in the mid-1990s to nearly 70 percent in 2006. When the housing market crashed in 2007, millions of American homeowners had to walk away from their homes, missing out on the opportunity to gain equity as home values recovered in the years to come.

"When the housing market tripped up a decade ago, homes that went into foreclosure fell hard--their value dropping substantially more than homes that didn't experience a foreclosure," said Zillow Senior Economist Aaron Terrazas. "But markets will never overlook a deal, and for much of the economic recovery, homes with a history of foreclosure have been a deal. This remains so today, although somewhat less so than a year ago."

Terrazas noted while the overall market is facing growing headwinds, homes that were foreclosed upon during the bust are "picking up steam, speaking to the enduring appeal of affordability. For families who lost their homes during the housing bust and were locked out of the market for several years thereafter, this was a critical lost opportunity."

Other key report findings:

--Of all foreclosed homes, 45.4 percent were among the least expensive third of homes; only 16.9 percent were among the most expensive third of homes. San Francisco, Bridgeport, Conn., and San Jose, Calif. had the greatest share of foreclosed homes among the bottom-tier.

--Foreclosed homes gained value faster than other homes, and in many markets, are more valuable now than ever before. Since the recovery, foreclosed homes have gained 74.5 percent in value, while the typical U.S. home has gained just 46 percent. Also, while appreciation has slowed over the past year for all homes, it has accelerated for foreclosed homes.

--In many cases, investors bought foreclosed homes and converted them into rental properties, benefiting from the recovery as home values bounced back. The percentage of single-family homes being rented is up from 2005, but appears to have peaked at 28.4 percent in 2016. Since 2016 it has fallen to 28.1 percent.

Mikhitarian said part of the reason homes in the bottom-third experienced higher rates of foreclosure is because home values for lower-valued homes plunged more dramatically during the recession than more valuable homes. And as home values fell, negative equity skyrocketed.

"Homeowners in negative equity are more likely to be foreclosed upon, especially those in deep negative equity that might see little point in throwing good money after bad just to stay in a home they may realistically have little to no hope of one day selling for a profit," Mikhitarian said. "And even for those that avoided negative equity and/or chose to continue paying their mortgage, the recession had more in store. Layoffs and unemployment spiked during the recession, leaving many out of work for years and/or forced to accept lower-paying jobs than they previously occupied just to make ends meet. This was especially impactful for lower-income workers, many of whom typically have thinner savings and a more difficult time absorbing financial shocks like loss of employment and unexpected expenses."

Adding insult to injury, Mikhitarian said, those who lost their homes to foreclosure were forced to re-enter the housing market as renters. "The sudden new demand for rental housing caused rents to skyrocket throughout the recovery, so homeowners that were foreclosed upon were now putting a larger portion of their income towards rent every month--something that wasn't helping them accumulate wealth," she said. "Even worse, these once-homeowners were never able to realize the sometimes-huge increases in their homes' values during the recovery."

The report said in 21 of the top 35 U.S. housing markets, foreclosed homes have surpassed their pre-recession peak. In Denver, foreclosed home values fell 21.2 percent during the bust, but have since grown by 116 percent since home values bottomed out and are now worth 69.9 percent more than they were during bubble peaks. Nashville and Austin have experienced extremely strong growth, too, particularly among foreclosed homes.

"If foreclosed homeowners had been able to hold on, they would have been able to see their home's equity--and therefore their wealth--increase," Mikhitarian said. "Even if a previously foreclosed-upon homeowner had been able to accumulate new wealth through savings or other assets after their foreclosure, laws often prohibited many of them from reinvesting that wealth back into housing for seven years. It's likely that millions of hardworking Americans found ways to hold on to their homes through the first few years of the recession, only to be foreclosed upon later--which actually turned out worse for them than simply giving the home up in the early years."

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