This news sippet below describes another of the reasons why we keep our investors away from cheap starter home neighborhoods in Austin. The starter home areas are generally populated with sub-prime borrows and first time buyers who are more subject to foreclosure and who generally don’t have the extra money to invest in the look and appearance of the home.
These areas are also often over-sold to less enlightened investors and so you add a high percentage of renters into the mix. Investors are attracted to these areas by a single overwhelming force – their spreadsheet. The initial cash flow on these cheapo homes looks better than the cash flow on the homes we sell. But we don’t sell homes for cash flow, we sell homes that have appreciation potential which are located in neighborhoods and areas where pride of ownership is evident and where the average American family would feel safe and happy living.
Neighborhoods riddled with foreclosures quickly develop other kinds of problems.
In fact, one foreclosure will shave up to 1.5 percent off the value of the other homes on the same block, according to research by Dan Immergluck, associate professor of city and regional planning at Georgia Institute of Technology.Other costs are harder to measure, but municipal governments, police departments, and neighbors observe that empty homes give rise to an increase in thefts and may encourage drug dealers and even violent criminals to take advantage of the situation.
As homes fall into foreclosure, a neighborhood frequently turns more transient, analysts say. Investors often buy homes in foreclosure and rent them out if they can’t sell them.
“You end up with a very fragmented community,” says home owner Ann Fulman of Atlanta. “When investors buy them and turn them into rental property … folks come in [who] don’t have the means to keep up the place.”
In the Atlanta suburbs of Gwinnett County, the police department recently created a Quality of Life unit to address problems often associated with foreclosures. Working with other government agencies, the unit targets such issues as building-code enforcement, vagrancy, and graffiti.
I’ve been wondering how hard this would hit Austin and the suburbs. The market is doing so well, and I don’t have a good guess. Do you have any stats for the area?
I read an article on MSN about a mortgage company trying to modify pre-foreclosure loans to help stave off this problem:
http://www.housingwire.com/2007/04/02/emc-mortgage-forms-mod-squad-servicer-publicizing-loan-workouts/
This is an interesting idea.
FYI- I saw an article in the Statesman about sub-prime loans in Central Texas. It stated approx. 10% of loans last year were sub-prime maybe we won’t feel a pinch until things slow down?
I work for http://www.CurrentForeclosures.com , a foreclosures site, and although Austin does not have as many foreclosures as many other cities in Texas, we have noticed that they are bringing down home prices. The foreclosures sell for 30-50% less than what they are worth, and it is hard for sellers to compete with these low prices. I do not think that the foreclosure market will hit Austin hard, or at least not as hard as other cities across the country.