PERSON OF THE WEEK: In a recently published paper titled ‘Foreclosure-Related Vacancy Rates,’ Federal Reserve Bank of Cleveland research economist Stephan Whitaker concluded that foreclosure can permanently scar homes, leaving them vacant for years after a sheriff's sale. To learn more about the study and what it means for servicers and policymakers, MortgageOrb sat down with Whitaker in this installment of Person of the Week.
Q: What inspired you to research foreclosure-related vacancy rates, and did your findings surprise you at all?
Stephan Whitaker: We are planning to do some research related to a land bank in our area. The land bank deals mostly with vacant homes, so we needed a good measure of the existing vacant homes to help select a control group. Although vacancy is obviously an important characteristic of the housing stock, we discovered that researchers almost never use parcel-level vacancy data. Everyone knows, in general, that foreclosed homes are vacant for a long time, but no one had hard numbers on how long.Â
I was surprised to find a long-term increase in vacancy in middle- and low-poverty neighborhoods. I expected to find six to 18 months of vacancy following the foreclosure. The elevated vacancy I found extending out for four to five years was a surprise. Before this analysis, I thought, like most people would, that non-distressed neighborhoods would eventually absorb foreclosed homes back into the housing stock as if nothing had happened. Unfortunately, that is not the case.
Q: In what ways is the foreclosure situation in Cuyahoga County, Ohio, (where the study's data comes from) unique, and do you believe characteristics of the market there are applicable elsewhere?
Whitaker: Cuyahoga County is the center of an metropolitan statistical area (MSA) that lost population since 2000. Only about one in 10 MSAs in the U.S. lost population, so it is on that end of the spectrum.
But many central cities – Chicago, Memphis, Baltimore, etc. – and central counties lost population even while their MSAs grew. If the population of an area is falling or growing more slowly than the housing stock, the math dictates that some homes must be left vacant. In normal times, the oldest, least-maintained homes are "filtered out" of the housing stock. The foreclosure crisis created a big wave of old homes falling into that never-to-be-reoccupied status. I think you could find a few dozen census tracts that display this phenomenon in every MSA where construction outran population growth since 2000 (that is, most places).
The dynamic in middle- and upper-income neighborhoods with newer housing stock is different. In theory, homes in these areas should return to normal occupancy because the bank or federal agency that owns them can always lower the price until they become affordable for a low-income household to move up to.
Two questions that need further research are: (1) Are most mid- to upper-income foreclosed homes ending up as investor-owned rentals because not enough low-income households qualify for properly underwritten financing? (2) Is the higher post-foreclosure vacancy explained by the normal contrast between rental and owner-occupied vacancy rates?
Q: Your analysis found a disparity in the length of time that it takes federal agencies to resell REOs versus the length of time that it takes banks, investors and nonprofits to move distressed properties. Is there any way to discern why or how that came to be?
Whitaker: The best way to find out would be to talk to people servicing the properties for the agencies and the banks. The fact that the agencies hold very few properties for more than 12 months suggests that reselling within a year is a deliberate policy effectively implemented. While there are only a few agencies – Fannie, Freddie, HUD and VA – with significant holdings in our data, there are a couple dozen banks that no doubt have a variety of policies. The resale trend I report in my study is an average over all banks.
Q: The study finds a correlation between the length of time that an REO remains vacant and the scope of negative impact of the vacant property on neighboring properties. Short of deep price discounts, do you believe there are steps servicers and banks can take to accelerate the REO disposition process?
Whitaker: My research has been on the observed outcomes in the data, so I do not have any detailed knowledge of the servicers' administrative procedures. What follows are just my thoughts based on the economic theories of information and uncertainty.
REO properties are usually sold as-is. This creates a lot of uncertainty, and many qualified buyers may steer away. Some private sellers purchase home warranties for their homes. A warranty might substitute for the REO home's lack of disclosures and recourse. The price the buyers pay would have to cover the cost of the warranty premium. For buyers to purchase a warranty on a single home might be cost-prohibitive, but a bank might negotiate a better rate based on their pool of REO. If the premium is included in the purchase price, the buyer is financing it, which also makes the burden easier to bear. This could expand the pool of potential buyers without drastically cutting the prices.
Q: Since the findings of your study were published, there has been a resurrected push by some policymakers to create mechanisms whereby the federal housing agencies can transform their REOs into rental properties. Do you believe such a concept could make a meaningful difference on vacancy rates and home prices?
Whitaker: An agency rental program might decrease vacancy in the medium term, but probably not in the long term. A key question is whether the homes would be marketed for sale and rent at the same time.
If the agency tries to sell the home first, and rent it only if it fails to sell after six or 12 months, then the home will still be vacant while it is for sale. If the home is available for rent immediately after the foreclosure auction, it is in the same market as the foreclosures purchased by landlords today, with the same turnover and between-tenant vacancy. If the out-year foreclosure gap (higher vacancy in previously foreclosed homes) reported in my research is due to foreclosed homes becoming rentals, then an agency rental program shifts that status forward, rather than eliminating it.
Pacing the sale of these homes over several years should slow the speed of the decline in home prices. In the long run, the market fundamentals will dominate. Very few regions can expect population growth to fill vacancies until the employment situation recovers. There is not enough job creation to attract domestic or foreign migration. Within regions, the weak job market is discouraging people from forming new households. With a steady income, many young people would move out of their parent's homes or rent their own place without roommates. This would absorb surplus housing and eliminate vacancies. Like many things, the vacancy situation is awaiting the return of ample jobs.
