Wednesday, June 17, 2009

The True Cost of Foreclosures

Foreclosures are running rampant across the country. According to recent studies, an estimated 1 out of every 300 households was forced into foreclosure last month. If you have not witnessed a foreclosure, you may think the only people affected are the homeowners and banks. However, foreclosures actually affect their entire neighboring community, and can drastically impact local tax revenue.

Decreasing Real Estate Values

There are actually several reasons foreclosed homes are bringing down real estate values. Many foreclosures happen quietly and quickly, where residents in the area do not even realize the house was empty until the foreclosure sale sign is in the yard. However, some homes are littered with huge warning signs, or sit on the market unkempt for months. Since there is usually no one in charge of maintaining foreclosed homes, yards grow tall, pools fog up, and the whole home itself begins to look artificially aged. In order to unload these properties the banks will drastically reduce their asking price. This forces regular sellers to lower their prices in order to stay competitive, and results in deflated real estate values for an entire neighborhood.

Devalued Neighborhoods

In addition to forcing sellers to reduce prices, foreclosed homes can also devalue a neighborhood just by sitting there unsold. As I mentioned before, the banks do not assign someone to look over the property, and if several homes on one street go into foreclosure then it can quickly turn the neighborhood into a ghost town. Once the area begins to decline, real estate values will drop quickly, and residents will find it nearly impossible to sell their homes.

Loss of Local Revenue

When a house has been vacated due to foreclosure, it means that there is no one living in the property, and there is no one to pay local property taxes. This can be disastrous to local government agencies that rely on this revenue. For example, the municipality of Greenville, California received over 40% of its revenue from property taxes and in the past year alone home values have decreased by over 15% due to record foreclosure rates. This had led to a budget shortfall and the town is now desperately struggling to get by without the additional funds full occupancy of its homes would bring.

Reassessed Property Tax Rates

Even if a foreclosed property is sold, the local government is going to get less money then it would have if the original homeowner had stayed. This is because property taxes are based on the value of the property, and if a house sells for significantly less then it had five years ago, then its tax rate will be reassessed and taxpayer will only be required to pay the reduced property tax.

Additional Costs to Local Governments

In addition to the lack of property tax revenue, the overall cost of a foreclosed home can be quite large. According to a study from Chicago, the cost of securing and processing a foreclosure can be as high as $5,400 per property. Furthermore if the property is abandoned for more then a few months, local governments will lose out on utility taxes, and may have to pay for water service, and trash removal. The total estimated cost on a foreclosed property could be as high as $20,000.

Local Service Cuts

With out this valuable revenue from property taxes, many cities are being forced to make up the revenue elsewhere. Local governments are being forced to lay off city workers (including firefighters and law enforcement), cut funding for education, increase retail taxes, and even sell precious historical landmarks. There is not a lot taxpayers can do to prevent these rash actions in their hometowns but sit by idly and hope that they do not get hit with a tax increase.

What can YOU do?

One of the best ways to counterbalance your communities’ loss in city revenue is to directly support your local economy. By making a few changes to your spending habits, and encouraging your neighbors to do so as well, you can make a difference. To learn more about how you can help, be sure to check out an entry I posted a few weeks ago titled 10 ways to help your local economy with your tax refund.

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