Foreclosure Activity in New York City, and the Neighborhood Impacts of Foreclosures Testimony of Vicki Been Elihu Root Professor of Law Director, Furman Center for Real Estate and Urban Policy New York University Before New York City Council Committee on Community Development Albert Vann, Chair January 22, 2009 Chairman Vann and all the members of the Committee, I am honored to be here today to share with you some of our research on the state of foreclosures in New York City and the effects of mortgage foreclosures on the surrounding community. .My name is Vicki Been, and I am the Elihu Root Professor of Law at New York University School of Law and director of the Furman Center for Real Estate and Urban Policy. The Furman Center is a joint research center of NYU’s School of Law and its Robert F. Wagner School of Public Service. Founded in 1995, the Center brings the talents of our law faculty and our urban economics faculty, along with the talents and energy of phenomenal students from all parts of New York University, to bear on urban problems. We are one of the nation’s leading academic research centers devoted to the public policy aspects of land use, real estate development and housing. Few urban problems have been more vexing, or more threatening, than the huge numbers of mortgage foreclosures plaguing our communities. To understand better where foreclosures are happening and how they are impacting our communities, the Furman Center has undertaken Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 2 several studies to examine the patterns of New York City foreclosures and the external costs they impose. I will describe our research on both these issues in turn. Foreclosure Activity in New York City: The Furman Center has data on foreclosure filings in New York City since 1993. Foreclosure activity was relatively stable (and relatively low) in the first years of the 2000s. But in 2006, as the subprime mortgage crisis was beginning to unfold, we saw a sizable increase in the number of foreclosure filings, and have seen sharp increases year-to-year since then, reaching up to 15,000 foreclosure filings in 2007, and nearly 13,000 in the first three quarters of 2008. Foreclosures in New York are very concentrated, with the most foreclosure activity taking place in areas that have seen high rates of subprime lending and in largely minority communities. Among the ten community districts with the highest rates of foreclosure in 2007, seven also were among the ten community districts with the highest rates of subprime lending in 2006. In nine of those neighborhoods, the population is at least 86% non-white. Queens and Brooklyn have been hit the hardest. In 2007, those two boroughs accounted for 78% of the City’s foreclosure filings. And within those boroughs, certain neighborhoods are being affected much more than others. Take Jamaica, for example; in 2007, Jamaica was home to 31% of the foreclosure filings in Queens, even though it makes up only 9% of the borough’s housing units. Or in Brooklyn, East New York had three and a half times the number of foreclosure filings as the entire borough of Manhattan. Looking just at the number of foreclosure filings can sometimes be misleading, because each community district features a different composition of housing types. In order to make fairer comparisons across neighborhoods, we also look at the rate of foreclosure filings per 1000 1-4 family properties. These rates reveal similar disparities; in 2007, Bedford Stuyvesant had a Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 3 rate of 65.3 foreclosure filings per 1000 1-4 family properties, more than three times the citywide average of 20.2.1 Unlike many parts of the country, where condo foreclosures are more common, in New York City the vast majority (about 91%) of foreclosure filings are on one-to-four family properties. Moreover, 60% of all foreclosure filings are on 2-4 family buildings or 5+ buildings, resulting in many innocent renter households being affected by the foreclosure crisis. The Furman Center estimates that in 2007, at least 15,000 renter households were living in buildings that entered foreclosures.2 The Effects Foreclosures Have on the Value of Neighboring Properties: Foreclosures obviously harm those who are losing their homes, as well as their creditors. But if foreclosures also harm third parties such as neighbors, the broader community, and tenants, the justification for government intervention in the crisis becomes even more compelling. To assess the external effects foreclosures have on neighbors and the broader community, we examined the impact that the filing of a foreclosure notice has on the sales prices of nearby properties. We evaluated these impacts at different distances and over different periods of time. We take into account unobserved characteristics of the neighborhood, as well as broader economic conditions. Our model accordingly does a better job of controlling for the various neighborhood characteristics that may affect both sales prices and the likelihood that a foreclosure will occur nearby, which allows us to isolate the impacts foreclosure starts have on prices from the impacts of other market conditions. 1 Appendix A provides the numbers and rates of foreclosure as well as rankings of the community districts, a map of citywide foreclosure activity, and correlations between foreclosure filings and community district characteristics. 2 This analysis is included in Appendix B. Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 4 Before I share our results, it is useful to review the various hypotheses about why foreclosures may have a negative impact on surrounding housing prices. First, property owners who are in default on their mortgages may be less likely to maintain or upgrade their properties, either because they have less incentive to maintain property they may lose, or because the mortgage default results from financial problems that also constrain the property owners from taking appropriate care of their homes. Properties may start to appear rundown as a result, which may make the surrounding homes less desirable. Second, after completion of foreclosure proceedings and eviction of the delinquent borrower, the property may sit vacant and suffer further physical decline. Vacant properties are likely to depress surrounding property values because they contribute to neighborhood blight, may attract vandalism and crime, and more generally signal that the neighborhood is not stable. Even if the vacant properties are well maintained and do not attract criminal or other undesirable activities, they add to the local supply of available units, and under the law of supply and demand, will thus depress property values. Third, distressed properties sold either at foreclosure auctions or pre-foreclosure sales may be more likely to be sold to investors and become renter-occupied, which may lead to lower levels of maintenance even after the properties are re-occupied. Finally, properties with distressed loans are likely to sell at a discount – both at pre-foreclosure sales and at foreclosure auctions – thus affecting the price of “comparables” used to estimate neighboring property values. If foreclosures are clustered by neighborhood, the magnitude of these negative effects is likely to increase. Further, the size of these effects is likely to differ according to the strength of the housing market. Foreclosed properties are more likely to remain vacant for longer periods in stable or declining housing markets than in appreciating markets. Our research shows that foreclosures have a depressing effect on nearby sales. Properties near recent foreclosure starts on average sell at lower prices than comparable properties in the Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 5 same neighborhoods that are not near foreclosure starts. As expected, the size of the price impact generally increases with the number of nearby foreclosure starts, although the marginal impact of each additional foreclosure decreases once there is a concentration of foreclosures in a neighborhood. Specifically, we find that: The sales prices of homes within 250 feet of at least one property for which a lis pendens had been filed in the prior 18 months were 0.8 percent lower than the prices of similar properties in the same neighborhood but not within 250 feet of any recent foreclosure start, all else equal. The depressing effects of foreclosure starts on property values appear to linger beyond the time period when we might expect the foreclosure to be resolved; being within 250 feet of foreclosure starts that occurred more than 18 months before the sale is associated with a 1.4 percent decrease in sale price. Sales prices appear to be sensitive to foreclosure starts that occur at up to 1000 feet away from the property, but the size of the impact decreases with increased distance, and shows some evidence of a threshold effect. Sales prices of homes between 250 and 500 feet of three or more properties for which a lis pendens had been filed in the past 18 months were 1.4 percent lower than the prices of comparable properties with no foreclosure starts within that distance. However, being within 250-500 feet of 1-2 recent foreclosure starts was not associated with a drop in sales prices. Similarly, when looking at the effects of foreclosure starts between 500 and 1000 feet away, we found that homes proximity to 6 or more foreclosure starts in the previous 18 months was associated with a 2.8 percent Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 6 decrease in sales price, but found no significant impact of fewer than 6 foreclosure starts.