For more than a decade, homeowners have been concerned that the use of foreclosed homes in appraisals has a negative impact on home values. The study may put homeowners’ minds at ease.

With recession looming, UCI researchers seek to uncover whether foreclosures hurt appraised property values

July 28, 2023 • By The UCI Paul Merage School of Business

Since the 2008 housing crash, many people have been concerned that their homes would lose value due to the abundance of foreclosed homes nearby that can be used to calculate the worth of their property.

Appraisers will use nearby homes that were recently sold to determine the price of a residence. Sometimes, they will use foreclosed properties to come up with the value. Because this has been a lingering concern for many, and with a potential recession on the rise, professors James Conklin, N. Edward Coulson, and Moussa Diop decided to find out whether there was any truth to this anxiety.

The researchers set out to determine whether the use of distressed properties, or comparables, made an impact in appraisals. Foreclosed homes are considered distressed comps.

Researchers found that they are not a drag on appraised value because appraisers learn to make the right adjustments over time. Coulson said that appraisers adjust the comps so that they become an “apples to apples” comparison with the subject property. This is a particularly notable finding because industry experts traditionally have suggested that using distressed comps in an appraisal isn’t desirable. Furthermore, researchers’ personal conversations with appraisers revealed that they tend to avoid using foreclosures as comps due to the uncertainty surrounding the properties, and the difficulties of determining the correct price adjustment.

“The worry was if you use foreclosed property to evaluate a new property, how is that going to have an impact because the foreclosed property is going to have a lower sales price, and then they're going to lower the appraisers valuation of the subject property,” Coulson said. “We found that had a tiny bit of validity in the beginning of our sample period. But then by the end, it was basically a non-issue.”

With a potential recession on the horizon, Coulson said there isn’t yet an uptick of foreclosures around the country. But, if the economy takes a downturn, the findings may bring some peace of mind to property owners looking to sell.

“Even though property values are falling, they’re not yet falling like they were during the recession,” Coulson said.  “But if there were a wave of foreclosures, people who read about our results can know that appraisers make the right adjustments.”

The distressed comps study is part of a larger real estate analysis from Coulson and his fellow researchers. In the paper, the researchers note their investigation also raises a number of interesting questions, like whether the impact of distressed comps varies with area demographics. This was informed by the finding that distressed comps are more common in areas with a greater share of Hispanics and minorities.

Coulson said there are a handful of related research projects underway. One he is particularly interested about delves into whether there is systemic racial discrimination against minority populations in the appraisal process.

“There's been a wave of news articles about African American households getting really low appraisals, and then doing things like having white stand-ins or taking all the family pictures out and replacing them with white family pictures before having an appraiser come in,” Coulson said. “The articles point out that all of a sudden the appraisal gets a lot higher after these families do this and it raises the question of whether there’s any kind of systematic discrimination against African American or Hispanic or Asian populations when appraisals are being done. That's a major project that we're working on right now.”