Report: Foreclosures don't significantly reduce housing consumption

Despite the recent flood of foreclosures on residential mortgages, little is known about what happens to borrowers and their households after their mortgage has been foreclosed. A Federal Reserve Board of Governors studied the post-foreclosure experience of U.S. households using a unique dataset based on the credit reports of a large panel of individuals from 1999 to 2010. The results suggest that, on average, foreclosure does not impose an economic burden large enough to severely reduce housing consumption.

For example, if post-foreclosure households tend to rent their subsequent housing, the flood of foreclosures could signal a substantial increase in the demand for rental units. Since rental and owner-occupied housing units tend to be different types of structures in the United States, this shift in demand could alter the type of residential structures in the economy. Beyond their impact on housing markets, foreclosures can influence personal finance, family structure, employment opportunities, the quality of available schooling and many other dimensions of an individual's economic and social welfare.

In summary, the majority of post-foreclosure migrants do not end up in substantially less-desirable neighborhoods or more crowded living conditions. Since housing unit quality is highly correlated with neighborhood amenities or desirability, they are not likely to live in considerably lower quality homes than they did before.

For the full report: www.federalreserve.gov/pubs/feds/2011/201132/index.html