Foreclosures and Consumer Perceptions

In March 328 owners and renters in greater Chicago answered a set of questions about their willingness to invest in housing. In August 349 renters in greater San Francisco did the same. For each respondent we collected a zip code, allowing a matching of the 'neighborhood' foreclosure rate to the respondent. The result? No surprise, foreclosures weaken consumers' enthusiasm for buying or maintaining a home.

We asked "How many people who buy a home this year will lose it in a foreclosure?". The mean answer was between 35 and 38 in both cities--quite a bit higher than reality (the most pessimistic estimate is 20/100 could lose their home). In both areas each percentage point increase in foreclosure rates (say from 2% to 3%) results in consumers perceiving about a 6/100 increase in the risk of foreclosure. This is controlling for age, income, race, language and other factors. It also includes fixed effects to account for any unobserved characteristics of the zip code.

Among owners in Chicago (owners were not included in the San Fran sample), an increase in foreclosure rates was associated with a 5% decrease in willingness to invest in a $5,000 home repair or improvement. In San Francisco each percentage point boost in foreclosure rates was associated with a 10% drop in agreement with the idea that owning a home is better than renting in general. Renters also show about an 8% reduction in willingness to buy a home in 6 or 12 months for each point rise in foreclosure rates (although not in 36 months).

The general finding is that owners in high foreclosure areas, even controlling for the other factors you might expect to influence opinions, are report a lower level of willingness to maintain their homes. Meanwhile renters in higher foreclosure areas have a reduced willingness to buy a home at least in the short (under 2 years) run. This has the potential to create a negative feedback loop where high foreclosure areas have lower levels of investment in housing, which undermine home values and could result in more foreclosures on the margin.

The current policy debates about rescuing lenders versus borrowers, and the allocation of subsidies to buy/renovate/demolish foreclosed properties should heed these results. Foreclosures do not happen in isolation and the ripple effects of an additional foreclosure on a neighborhood should not be underestimated.