Many real estate professionals note that for every foreclosure that occurs within a neighborhood, the value of the homes around it drop by about 1.5 percent.
While typically not very significant as foreclosures occur somewhat infrequently, if multiple foreclosures occur within one neighborhood in a short period of time, a crippling value drop can take place.
Imagine the areas suffering the most from the recent housing bust, such as the inland Central Valley in California or Las Vegas, Nevada.
The problem with these areas and many like them is that they were built up too quickly, creating huge inventories and a supply that simply couldn’t be met.
To accommodate the builders, banks and mortgage lenders nationwide created aggressive mortgage programs to get new homeowners into these new developments, often pitching 1% option-arms and other high-risk loans.
But now that the housing boom has gone bust and most of these loans have lost their initial low mortgage payments, many of these unwitting homeowners must sell or face foreclosure.
And if multiple foreclosures take place in these areas the drop in home prices could be massive, especially with the over-supply and present poor demand.
Not to mention more stringent underwriting guidelines and fewer investors buying higher-risk mortgages.
The impact could be devastating unless the government can figure out a way to solve the imminent foreclosure crisis.
The sliver of good mortgage news is that many metropolitan areas in the United States such as Los Angeles and New York City are saturated, and new development is rare and cumbersome.
Those areas will likely retain much of their current value, though it will still be a buyer’s market with a smaller pool of available, qualified homebuyers.