Foreclosures Drive Down Property Values Twice As Much As Vacancies

As the housing market continues to weigh on the economic recovery, politicians are debating the best way to clear a glut of foreclosed properties off the market in the name of housing prices.

Former Massachusetts Governor Mitt Romney, a Republican candidate for president earlier this week told a newspaper in Nevada -- the state with the highest foreclosure rate -- that officials shouldn't "try to stop the foreclosure process."

President Barack Obama's administration has tried a variety of programs with varying levels of success to help homeowners avoid foreclosure. Obama's flagship plan, the Home Affordable Modification Program has resulted in fewer than 700,000 modifications so far, despite promises that it would aid 3 to 4 million home owners.

Many homeowners across the country continue to live in foreclosed homes, pushing down the value of the houses around them. Properties that are occupied, but in foreclosure, drive down neighboring home values twice as much as vacant properties, a new study from the Cleveland Federal Reserve finds.

And the problem may only get worse. Banks are upping the number of foreclosure notices they send out, as the number of Americans at risk of foreclosure grows.

In some areas, elevated foreclosure rates are costing surrounding homeowners billions. In Oakland, California the total loss to homeowners due to the foreclosure crisis could hit $12 billion by the end of next year, according to CBS San Fransisco.

The foreclosure crisis has put such a drag on property values in cities like Oakland and states like Nevada that half of borrowers of prime loans -- or loans made to borrowers with good credit and income -- will be ultimately end up owning more on their home than it is worth, according to a report earlier this month from Fitch Ratings. Housing prices have fallen 32 percent since 2006 boom, according to the S&P/Case-Shiller home prices indices.

The housing crisis has gotten so dire that the Federal Reserve is looking for ways to solve it. The Fed plans to send "legislative recommendations" to Congress about the best way to spur housing market growth, according to one Senator as reported by Reuters.

In a speech on Thursday Fed Governor Daniel Tarullo had a particularly dramatic way of describing the housing market:

"Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole," he said, according to Reuters.