Foreclosure doesn't usually mean coming down in the world, economists at the Federal Reserve have found.
The majority of borrowers do not end up in substantially less desirable neighborhoods, nor do they endure more crowded living conditions after a foreclosure, according to the economists' working paper, which the Fed posted online July 14.
"They are not likely to live in considerably lower quality homes than they did before," wrote economists Raven Molloy and Hui Shan. "These results suggest that, on average, foreclosure does not impose an economic burden large enough to severely reduce housing consumption."
A foreclosure typically has no impact on the size of a household and few people end up living in larger households to defray living expenses, says the study, presented to the Fed in May. Moreover, the majority of consumers who went through a foreclosure were still living in a single-family home afterwards, only this time as renters, Molloy and Shan found.
"Moreover, their new neighborhood does not have significantly lower median income, median house value, or median rent than their old neighborhood," the economists wrote.
From 2006 to 2008 just 22% of borrowers who went through a foreclosure switched to a multifamily rental building. Roughly 75% still lived in single-family structures.
Only about half of borrowers with loans in the process of foreclosure moved out of the home within two years, suggesting that borrowers are either continuing to live rent-free before an eviction, or that many foreclosures are worked out through refinancing or some form of loan modification, the economists found.
The economists used data from Federal Reserve Bank of New York's Consumer Credit Panel, which consists of 37 million individuals, who make up 15% of the adult population and 5% of those with credit files plus their household members.