The Unlocked Door of the Foreclosure Crisis

Last week, experts declared the U.S. housing market, finally, on a path toward recovery. Foreclosures, however, are far from a turning point—by some measures, we are only halfway through the bottleneck. In cities, the continued wave of foreclosures has hit harshly but not evenly, striking different neighborhoods more forcefully than others. Black households and neighborhoods, across hundreds of cities, face foreclosure at markedly higher rates than white ones.

Since the housing bubble burst, researchers have explored nearly every angle of the foreclosure crisis. In the latest issue of Journal of Urban Affairs, a quintet of researchers overturned two critical factors, neglected in research, behind the substantial racial gap in foreclosed homes:  “walkability” and investor ownership. In one city, the authors find, households in neighborhoods that are less “walkable”—close to downtown and designed for pedestrians—are far more likely to face foreclosure. But it is the reports’ findings on investors that is more significant.

The report zeroed in on Louisville, Kentucky, a mid-sized city with similar demographics and housing market characteristics to Midwestern and Southern metropolitan areas. The researchers collected rare, neighborhood-specific foreclosure sales data from 2007 and 2008, the peak of the housing crisis.

Using a neighborhood walkability measure, a “Walk Score,” the report concluded the significance of sustainable planning in strengthening city housing markets. For every 10-point increase in the walkability metric, Louisville neighborhoods experienced “10 fewer foreclosures over two years or an average of five fewer annually.” This relationship was reinforced by the presence of high priced loans, with interest rates above 7.6%, that swept into minority communities before the foreclosure crisis arrived.

From 2003, when predatory lending and housing prices both began to rise, to 2008, the number of investor owned homes in Louisville increased dramatically. In 2007, they accounted for 14% of the residential property; a year later, the total was nearly twice as great. According to the study, investor owned houses in minority neighborhoods were much more likely to face foreclosure than owner owned homes.

Their findings build on the growing body of research proving the recent crisis had a supply-side source:  behind the foreclosure spread was not irresponsible minority borrowers but, the authors write, “the behavior of financial institutions [and] investors who exploited the housing bubble while it lasted.” And their research suggests policymakers should be attentive to ownership within urban housing markets. In many neighborhoods, wreaked by destructive defaults, the hottest new investor product are now foreclosed homes.

Feature Photo: cc/Casey Serin