More than 4.4 million foreclosures have been completed from 2008 to September 2013. The massive number of foreclosures from 2008 to 2012 alone cost neighborhoods $2 trillion in property value. Losing $2 trillion in wealth from the economy badly hurt, because foreclosure acts on the economy in a variety of ways on the local, state and national levels. Individual homeowners are hurt by foreclosure, of course, but it also may depress property values as well as local, state and national tax revenues.
Foreclosed Homeowner Effects
As homeowners are foreclosed upon, they often lose access to low-cost lending sources, which may cause them to reduce expenditures in other areas. With millions of foreclosed homeowners reducing their economic activities, the effects on the local, state and national economy can be profound. For example, foreclosed homeowners generally are unable to obtain new mortgage loans for at least two years, removing many potential homebuyers from the market. Also, neighborhood foreclosures increase blight and depress home values, causing even more foreclosures.
Local and State Effects
In San Francisco, the housing market crash saw home values decline from 15 percent to as much as 40 percent. Declines in property value can lead to spikes in foreclosure rates in vulnerable housing markets, especially California's. Statewide, California saw homeownership decline by 22 percent as a result of the housing market crash and subsequent foreclosures. With so many foreclosures, Bay Area and California state tax property tax revenues declined, causing spending cuts in education, public assistance and transportation programs.
National Economic Effects
Foreclosures cost lenders, and to reduce their risk they make credit more difficult to obtain. The decreased availability of credit can slow the number of housing construction starts, with developers laying off workers to compensate. The housing market employs many people and large-scale unemployment may lead to reductions in individual spending, causing the economy to slow down in response. Many different industries also rely on and supply the housing market, and they too are affected as the market struggles to handle millions of foreclosures.
Federal Spending Effects
The federal government has spent billions since 2008 to reduce foreclosures. Economists disagree, though, on the effects of large-scale federal spending to help support economic activity, including in the housing market. On one hand, the Federal Reserve's relaxed monetary policies have kept mortgage interest rates low, leading to increases in available credit and homebuyers seeking it. On the other hand, the federal government has borrowed money to pump into the economy, increasing the national debt and the cost to service it.
- Chicago Tribune: Is the Foreclosure Crisis Over? Evidence Points Both Ways
- Federal Reserve Bank of Cleveland: The Impact of Foreclosures on the Housing Market
- Worcester Telegram & Gazette: Foreclosure Crisis Continues to Weigh on US Economy
- Americans for Financial Reform: We All Pay a Price For the Foreclosure Crisis
- Center for Responsible Lending: Foreclosures Drain $2 Trillion From Neighboring Homes, Half From Neighborhoods of Color
- Chicago Tribune: Mortgage Loan Now Requires Higher Down Payment, Credit Score
- Forbes: Federal Spending: Killing the Economy With Government Stimulus
- Federal Reserve Bank of San Francisco: What is the Fed: Monetary Policy
- Paragon Real Estate Group: 30 Years of San Francisco Real Estate Cycles
- USA Today: 2008 Financial Crisis Impact Still Hurting States
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