Wednesday, February 25, 2015

Not All Hard-Hit Neighborhoods Recover Equally

by Jackelyn Hwang
Meyer Fellow
Foreclosures disproportionately hit minority neighborhoods across the U.S. during the housing crisis. In Boston, over 80 percent of foreclosures took place in just five of its 15 planning districts—Dorchester, East Boston, Hyde Park, Mattapan, and Roxbury; nearly 75 percent of the residents in these five districts are non-white, while the remainder of Boston is 70 percent white. While we know foreclosures took place more frequently in these minority areas, we know less about the paths that foreclosed properties followed and whether these paths are similar across these hard-hit areas.

In a new working paper, I show that foreclosed properties within the hardest-hit areas of Boston have quite different trajectories, which leave some sections more disadvantaged than others in the housing market recovery. Integrating several data sources (foreclosure deeds, real estate sales transactions, property tax records, crime and 911 reports, constituent service requests, inspection violations, and building permits), I explore the following questions:
  • Who buys foreclosures? 
  • Do they maintain them? 
  • Do these characteristics affect the quality of the local neighborhood?

As in many other states, if a property owner in Massachusetts defaults on his or her mortgage and is unable to stop foreclosure proceedings (by paying the debt or negotiating new mortgage terms), the property is sold at a public auction. About 15 percent of the residential foreclosures (1-3 family units and condominiums) in Boston were purchased by investors directly at auction, but most properties remained in the hands of the bank following the auction. Eventually, the bank resells the property, but this can take many months and even years. During this time, the property is often unoccupied, which can lead to declining conditions of the property and the area around it. A local ordinance has attempted to stymy this by requiring owners of foreclosing properties, including lending institutions, to register with the City. Once the property is purchased from the bank, the property may follow many paths: owner-occupied or rented, fixed up, or left to decline.

The findings show that within Boston’s hard-hit planning districts, not all foreclosed properties and their surrounding areas have experienced the same trajectory in the wake of the housing crisis and recovery. Investors were more likely than owner-occupants to purchase foreclosed properties in sections that had greater shares of blacks, even after accounting for socioeconomic and housing characteristics of the areas and characteristics of the foreclosed property. Indeed, only around one in five foreclosed properties were purchased by owner-occupants in areas that were majority black, but nearly one in three were purchased by owner-occupants in areas that were less than 50 percent black. Moreover, individual investors were more likely than both owner-occupants and larger investors to purchase foreclosed properties in sections with greater shares of foreign-born residents.

When I examine how well new owners maintain their properties, the types of buyers who tended to concentrate in areas with higher shares of blacks were also less likely to maintain their properties. Foreclosed properties purchased by investors registered as trusts—which include non-owner-occupant family, realty, and land trusts and carry more legal risk than corporations, but also maintain anonymity and do not pay state fees—were 2.5 times more likely than owner-occupants to have maintenance-related inspection violations and service requests placed against them and were half as likely to obtain permits to fix their properties. Other types of investors were also more likely than owner-occupants to have maintenance-related inspection violations.

Lastly, areas where a higher percentage of foreclosures are purchased by investors registered as trusts also have higher rates of property-related issues in the local area. The lower quality of property maintenance and greater rates of blight in particular sections of these hard-hit areas can detract investment in the areas that need it most. Nonetheless, the distribution of various types of foreclosure buyers are not associated with local levels of crime and social disorder, such as loitering, but areas with higher foreclosure rates had more crime and disorder.

Consistent with a long line of sociological research on residential segregation and residential preferences, minority areas, and certainly those with high foreclosure rates, crime, and disorder, are in the least demand by all residents. Larger investors appear to be more willing or financially able to take on these assets, but how they maintain their properties has important implications for the future stability of these neighborhoods. After all, visible blight serves as an important cue for potential investors and households.

What can be done? Recognizing that owner-occupants may not be the only possible solution for foreclosed properties, given the relatively large stock over the last several years, policies can work to: 
  1. Develop financial incentives and provide resources to ensure that investors purchasing foreclosed properties maintain them; and, 
  2. Create resources and opportunities for smaller, local investors or owner-occupants to purchase and maintain properties in areas struggling to recover.
Creative programs like the Landlord Entrepreneurship Affordability Program, which supports low- and moderate-income families in purchasing, rehabilitating, and serving as an owner-occupant landlord in small-scale rental properties, are what truly distressed areas need. 

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