3 Factors That Reduce a Home's Value

BEFORE PLUNKING DOWN your life savings on a home, consider that the current owners and even the home inspector probably can't tell you everything you need to know about the
Nearby foreclosures, crime and environmental threats can end up costing a lot more than mold in the basement. Living close to a landfill, for example, can knock up to 15% off a home's value.
While sellers in some states are legally obligated to disclose information that might affect a buyer's decision to purchase a home, they often won't know, say, that a registered sex offender moved in across the street last month.
Ultimately, it's up to buyers to look into factors that go beyond the front yard, says Leslie Sellers, vice president of the Appraisal Institute, a Chicago-based trade organization. "People will spend days and weeks researching a used car and kicking tires, but when it comes to a home, if the decor suits them, they're ready to buy right then," says Sellers.
"Before you make an offer, walk the neighborhood and talk to neighbors," advises Sid Davis, a Farmington, Utah-based real estate broker and author of "A Survival Guide for Buying a Home."
Here are three value-draining factors worth investigating:

Foreclosures
Just a few years ago, home buyers barely considered the impact of foreclosures on a home's value. But as the rate of foreclosures climbs ever higher — the number of homes facing foreclosure in April rose 65% year over year, according to RealtyTrac — it's now an undeniable part of the equation.
A study co-authored by Geoff Smith, vice president at the Woodstock Institute, a policy group in Chicago, found that each foreclosure within an eighth of a mile of a single-family home results in a 0.9% decline in the home's value. Although the research only looked at data in Chicago between 1998 and 1999, the researchers contend that the overall findings still apply today. "If you were to replicate that study now, you'd probably find a bigger impact because there are more foreclosures and they're bringing down the housing market overall," says Smith.
Foreclosed homes often fall victim to neglect and vandalism, explains Stephen Fuller, director of George Mason University's Center for Regional Analysis. A concentration of foreclosed homes only magnifies the effect and undermines nearby property values, he says. Depending on the scale and duration of the problem and the lack of countervailing forces such as good schools or park land, the damage to a home's resale price will likely be significant, says Fuller.
Also, scan the real estate listings to see if a large number of homes are for sale in the area or if rental properties are on the rise. It could signal a more transient — and therefore troubled — environment, Fuller says. Also, look for short sales — when the asking price is less than the mortgage balance — "that's a sure next step to foreclosure," he says. Buyers can ask their realtors to look up short sales in a particular ZIP code or area. (Realtors have access to the data, which is provided by the Multiple Listings Service that is not made public).

Environmental threats
You've monitored for radon and tested the well water. Everything turns up clean. But do you know how far that landfill or abandoned manufacturing plant is from the front door? If they're too close it could lead to serious health issues — and weakened resale values.
A home located within a mile from a landfill, for example, will likely see a 10% to 15% reduction in value, says Robert A. Simons, a professor of urban planning and real estate at Cleveland State University and author of a 2006 study on the effects of environmental contamination on real estate values. Property within two miles of a Superfund site (a government-designated hazardous waste site) could suffer up to a 25% reduction in value (compared with a home that had no threat of environmental contamination), says Simons, who also wrote "When Bad Things Happen to Good Property."
Nuclear power plants, on the other hand, have a mixed impact on home values, he says. While perceived as scary, they offer some benefits such as a high tax base and high employment. An added bonus: "There's a huge buffer around those plants with lots of park land," he says. However, live too close — say, within half a mile — and the nearby plant starts taking a toll, Simons found. "Then you get into air emissions, pollution, and are you downwind or upwind," he says.
Consumers can search for Superfund sites near their homes on the Environmental Protection Agency's web site. The EPA also has a searchable database that tracks toxic chemical releases reported by certain industries.

Crime/Sex offenders
Looking into the crime rate of a prospective neighborhood is a no-brainer for most home buyers. But it won't tell you that a registered sex offender lives two houses down.
"I encourage people to presume that there will be registered sex offenders nearby," says Tara-Nicholle Nelson, a San Francisco-based real estate attorney and broker.
The closer a home is to a registered sex offender's, the greater the impact on its value, according to James Larsen, a professor at Wright State University in Ohio. Larsen's 2003 study of home sale prices in Montgomery County, Ohio, found that, on average, homes within one-tenth of a mile of a serious sex offender's residence saw a 17% drop in value, while houses between one-tenth and two-tenths of a mile sold for 10% less.
In order to search for addresses and pictures of registered sex offenders, go to Family Watchdog. The site also offers email and cellphone alerts if a registered offender moves into your neighborhood. For other crime statistics, AreaConnect lets users compare crime data for more than 8,000 cities.

by Smart Money

4 Signs Your Home Value Could Drop

Despite signs that the real estate market is bottoming out, millions of homeowners are likely to find themselves in worse shape within the next two years.

Nearly half of the nation's 52 million mortgage borrowers will have negative equity by the end of the first quarter of 2011, up from the 14 million at the end of this year's first quarter, according to estimates in an Aug. 5 report by Deutsche Bank. With so many borrowers "underwater" -- or owing more on their mortgages than their homes are worth -- the risk is high that they'll default and their homes will go into foreclosure, says Mark Zandi, the chief economist at Moody's Economy.com. (Moody's Economy.com estimates that 17.5 million mortgage borrowers will be underwater by early 2010.)

Negative equity is the product of several factors. The most significant weight is the broad and persistent decline in home values . A Zillow.com index of home values fell 12.1% year-over-year during the second quarter, resulting in a total drop of 22.3% since the market peaked in mid-2006, according to an Aug. 11 report by the online real estate marketplace. Many buyers who bought their homes around the peak with a 20% down payment have lost that dollar amount.

"The continued decline of U.S. home prices will contribute to rapidly rising rates of negative equity," Karen Weaver, a Deutsche Bank research analyst, wrote in the report. "The most obvious implication is for mortgage defaults." Current homeowners, or those shopping for a home and who are concerned that they'll end up underwater, should consider how long they expect to live in their homes. Being underwater doesn't affect homeowners unless they plan to sell, Zandi says. Individuals who are staying put for at least the next five to seven years will likely recoup the lost value of their home, says Amy Bohutinsky, a Zillow.com spokeswoman. In addition, homeowners should refrain from borrowing against their mortgages, she says.

Those who find themselves underwater can turn to the federal Making Home Affordable plan, which can help you refinance or do a loan modification. You'll have to meet the eligibility requirements.

Whether you're at risk for falling behind may have more to do with the economy and your neighborhood than your job, your credit or your income. Here are four warning signs that you're heading underwater.

Foreclosures in your neighborhood
The quickest way to end up underwater is to live in a neighborhood that's plagued by foreclosures. When one home on your block goes into foreclosure, your home's value drops by 1%, Zandi says. But that isn't a one-to-one relationship. If two homes on a block go into foreclosure, your home's value will drop by more than 2%. As homes go into foreclosure, they create a domino effect, lowering home values throughout a neighborhood in a cascade beyond homeowners' control.

Homes lingering on the market
When "For Sale" signs linger in a neighborhood for three or more months, that may mean buyers and sellers can't agree on a price. In that environment, homes are unlikely to sell unless the sellers lower their asking prices.

"The time on the market is always a good barometer of demand for homes and for the price homes are transacting at," Zandi says. "The longer it appears that neighbors are taking to sell their home the more likely it is they're not getting the price they want and that prices are falling."

Compare the time it took for homes to sell in your neighborhood three years ago versus today; if it's taking weeks or months longer to sell, the prices homes can fetch are dropping, Zandi says.

Increasing unemployment
In most cases, the cities where homes have lost the most value during the past year also possess the highest unemployment rates.

Homes in Merced, Calif., have lost 40.2% of their value year-over-year, the biggest loss of home values in the nation, according to Zillow.com. The city's unemployment rate is the fourth-worst among 372 metropolitan areas at 17.6%, according to July data from the Labor Department. El Centro, Calif., where home values plunged 37.6% year-over-year (the second-biggest drop in the country), has the worst unemployment rate at 30.2%.

Individuals living in areas battered by high unemployment are likely to see their home values drop further, especially if they live in areas dependent on dwindling industries -- like Central Valley, Calif., and the mortgage lending business or Detroit and the auto industry, Zandi says.

Homes in disrepair
Dented siding, peeling paint and broken porches could be signs that neighbors are having trouble making ends meet and can no longer pay to take care of their homes, Zandi says. Or they may have gotten an appraisal and discovered their homes have dropped in value and are no longer worth the cost of repairs. As the condition of homes in your neighborhood worsens, home values almost inevitably drop. "The mere fact that they're not investing in their homes will affect you too," Zandi says.

What underwater borrowers have in common

Risky mortgages: Some 77% of option-ARM borrowers and 50% of subprime mortgage borrowers were estimated to be underwater as of the first quarter of 2009, according to the Deutsche Bank report. With option-ARMs, borrowers could make minimum monthly payments that didn't even cover the loan's interest. As the market declined, these balances grew. With subprime mortgages, borrowers often had poor credit scores and little documentation of their financial situation. In both cases, borrowers often ended up with a large mortgage relative to the house's price.

Date of purchase: Individuals who bought their homes between 2003 and 2008 are at risk of being underwater because they bought while prices were rising, Zandi says. The risk is greatest for those who bought in 2005 and 2006, as the market approached its peak.

Excessive borrowing: Many individuals borrowed against their homes during the bubble by taking out second mortgages or tapping into home equity lines of credit or home equity loans. This borrowing left their homes with less equity to weather the drop in home values.

Home's location: The areas that have been hit the hardest by plunging home values include the "sand states" of Arizona, California, Florida and Nevada because they brought the most speculation, easy credit and overbuilding during the bubble, Zandi says. Also hurt: the states where unemployment is especially high and manufacturing jobs have been eliminated like Michigan, Ohio and Indiana, Zandi says.

By SmartMoney