Foreclosures continue to haunt displaced homeowners in metro Denver

July 07, 2016 / Posted in Denver, Developments, Real Estate

David Zalubowski, AP File

A foreclosure sign tops a sale sign outside an existing home on the market in northwest Denver on Wednesday, Aug. 29, 2007.

Metro Denver residents who lost their homes in foreclosure during the Great Recession must endure yet another indignity all these years later: watching on the sidelines as the properties they once owned skyrocket in value at some of the highest rates in the country.

Zillow, the Seattle real estate valuation website, calculated the appreciation rates that foreclosed homes in several metro areas experienced after hitting bottom, trying to get a rough sense of the home equity, a primary source of wealth for many families, that was foregone.

Nationwide, foreclosed homes lost almost 40 percent of their value during the bust last decade, and remain 16 percent below their peak values. The median value of all homes fell 22 percent during the downturn and are only 5 percent off their peak values.

In states such as Nevada and Florida, home values went so deep in the hole that many borrowers remain underwater despite years of robust appreciation. Walking away in those places doesn’t look like such a bad choice.

Metro Denver offers an entirely different scenario. Foreclosed homes dropped by 22 percent on average from their prior peak values. But they have since grown by 75 percent compared with a 62.2 percent rebound for all metro Denver homes from the market bottom.

That means homeowners who sold off worldly possessions, begged and borrowed from friends and family and endured months of frustration working through a loan modification to keep their homes made the right choice.

Some, however, walked out as soon as the foreclosure notice showed up, never putting up a fight. Many borrowers lost their jobs, while others struggled with mortgages so toxic there was no way they could keep up, Zillow chief economist Svenja Gudell said. A few made the economic choice to walk away from an underwater mortgage, uncertain of when and how much home values would recover.

Lending rules put borrowers who go through a foreclosure on a seven-year timeout, meaning those former owners not only missed the rebound in home values, but had to absorb big rent increases handed out as the housing market overheated.

Gudell notes a big irony of the housing bust: Many of those who lost their homes were forced to rent similar properties from investors who stepped in and bought them at a discount.

Even when borrowers who defaulted could get out of the penalty box and borrow again, they faced a much different housing market in metro Denver. The home that went for $200,000 at a foreclosure auction last decade now goes for $350,000, and sells quickly when it comes on the market.

Gudell said the foreclosure crisis has only served to widen the country’s wealth gap and fuel a deeper discontent. The bottom one-third of homes in value accounted for 51.7 percent of foreclosures in metro Denver, pulling down many people just when they thought they were finally getting ahead.