Obama's Fuzzy Housing Numbers

If President Obama is to sell his mortgage bailout plan to the public, an important argument will be his claim that preventing foreclosures actually helps all homeowners by preventing housing prices from dropping:

"This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild," Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. "It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone."

The claim that the program helps "shore up housing prices for everyone" has been frequently repeated by administration officials. Housing and Urban Development Secretary Donovan elaborated on the point:

And in all, this will help, as I said, 3 to 4 million families. But let's be clear: This will also help millions of other families, as well. Recent research shows that neighboring homes to foreclosed homes lose as much as 9 percent of their value. So people who are not in danger of foreclosure still are suffering from nearby foreclosures. This will help those families, as well. Our estimates are that the average home -- not the average home in foreclosure, but the average home across the country will gain $6,000 in value relative to had this plan not been put in place.

The 9 percent figure seems to come from a study by three analysts at Fannie Mae in a report titled, Spillover Effects of Foreclosures on Neighborhood Property Values, which was abstracted this way:

We project that the spillover effect of a foreclosure on neighborhood property values depends on two factors: the discount of foreclosure sale and the weight placed on the foreclosed property as a comparable in the valuation. The former is related to housing cycle and the latter varies by time of foreclosure and its distance from the subject property. Empirical results based on a 2006 sample show that this effect is significant within a radius of 0.9 km (roughly 10 blocks) and within 5 years from its liquidation. The most severe impact is an 8.7% discount on neighborhood property values, which gradually drops to anywhere between −1.2 to −1.7% for foreclosures liquidated within the past 5 years. These spillover effects vary slightly when the sample selection bias is taken into account. Based on an alternative sample of purchase transactions in 2003, the estimated spillover effects in booming years are reduced by half, confirming on the important role played by housing cycles.

The only problem is that the study doesn't prove what the Obama administration would like to say it does. Some of it is playing with data. For example:

1. It is only "the most severe impact" that is 8.7% -- this is a foreclosure within 0.1 kilometer of a house with the foreclosure occurring within the last two years. A house 1.5 to 2.0 kilometers from a foreclosure that occurred within two years experiences only a 0.7% decrease.

2. The $6,000 gain in value seems unlikely. The National Association of Realtors said that the median sales price of a home in the 4th quarter of 2008 was $180,100. So the administration is assuming the median home in America would fall in price by 3.3 percent due to neighborhood foreclosures. In order for this to occur, according to this study, the foreclosures would have to occur with a half mile of a house. Yet as Alan Reynolds pointed out in the New York Post, foreclosures are overwhelmingly occurring in just five states.

3. Even if true, the impact dissipates quickly. The study shows that a foreclosure within 0.4 to 0.5 kilometers causes a 4.3 percent dip in neighboring home values -- but only for the first two years. Between three and five years, the dip is down to 1.9 percent and after 6 years, only 0.6 percent.