New study from Harvard/MIT explores the effects of foreclosure proceedings on housing pricing

Bank Foreclosures have the effect of reducing the eventual value of the home by as much as 27, recent studies from Harvard University and the Massachusetts Institute of Technology report. The effect of bank foreclosure eventually reduces the final sale price of a house by an average of 27 percent as compared with the prices paid for comparable nearby properties. In turn, those homes located near these affected bank foreclosed properties lose 1at least % in value if within 250 feet of the foreclosed property.

But from a practical sense, Keith Gordon, a Florida based flat fee MLS listing service says “foreclosures and short sales have the overall effect of creating new lows in real estate prices by the nature of buyers. Once one lender accepts a offer from a buyer that is lower than other recent sales, this new sale crates a new low. This is a natural progression of any bear market where there are more sellers than buyers.”

In these recent studies, 1.83 million records where researched by the teams of economists at Harvard University and the Massachusetts Institute of Technology plowing through home sale records from 1987 to 2009. There conclusive research was also published in the journal American Economic Review, which is now recognized as the most comprehensive and extensive analysis of the losses sustained on foreclosed properties.

John Y. Campbell, the lead author from Harvard was surprised by the finding that “The losses on foreclosed homes proved to be much larger than we had expected.” said lead author John Y. Campbell, “If anything, these results may underestimate losses on foreclosed properties nationwide, since Massachusetts has not experienced a housing boom and bust as pronounced as that seen in many other parts of the country in recent years.” Campbell and his co-authors, Harvard's Stefano Giglio and MIT's Parag Pathak, found that other types of forced sales also reduce home prices, but by smaller amounts.

Similarly, when a house is sold after the death of an owner, the research group found that the price drops 5 to 7 percent on average. In comparison, when an homeowner declares bankruptcy, the value falls by an average of 3 percent.

The conclusion by the researchers is that they believe it is in the public's best interests to minimize foreclosures, which would appear to be rather obvious.