Where housing bust hits hard

Although America's housing downturn has rippled nationwide, its impact varies greatly by geography – right down to individual streets, developments, and ZIP Codes.

In many metro areas, far-flung suburbs and exurbs face sharper price declines than neighborhoods closer to city centers.

It's no secret, for example, that Florida is among the states where property prices flew high and fell hard. But in Tampa's ZIP Code 33607, near downtown, the median home lost just 1.3 percent of its value last year, according to new research. ZIP Code 33573, in contrast, lies about 18 miles away and saw a 22 percent price decline.

The housing bust is also falling heavily on low-income and minority neighborhoods. That's not just a story of borrowers with a weak ability to pay. The larger story, another new study finds, is that lenders made a headlong rush to extend credit where it was least warranted.

What links these trends is that in both zones – the exurbs and low-income communities – the housing market peaked with lots of new loans and with lenders stretching the limits of sound finance. Now, these geographic patterns are partly defining the nature of America's economic slowdown and could also influence policies designed to heal the housing market.

"You had a lot of first-time buyers," says Rick Sharga, a vice president of RealtyTrac in Irvine, Calif. "They bought ... an overvalued property with a risky loan."

One factor, in the exurbs, is this decade's home-building boom. Housing developments that were showing off brand-new units in 2006 now see multiple foreclosures. The land available for these developments was generally in exurbs or at the urban fringe.

"There was a mad rush [by builders] to bring housing supply on line," says Stan Humphries of Zillow.com, an online provider of real estate information. "Where you can do that is at the perimeter."

In hard-hit southern California, it's places like Riverside and San Bernardino – far outside Los Angeles – where subprime loans are heading into foreclosure at about twice the national rate. In L.A. itself, foreclosures aren't far above the national average, according to data from First American CoreLogic.

Washington State, although relatively unscathed in the housing downturn, shows a similar pattern. Snoqualmie, well outside Seattle, has seen home prices fall 10 percent in the past year, while some downtown neighborhoods are up in price, by Zillow's estimates.

It's not just vacant and foreclosed properties dragging prices down. When housing cycles cool, Mr. Humphries says, close-in neighborhoods often hold their value better. "All things equal, people would prefer to be closer in to the urban core" for the amenities and shorter commutes, he says.

Gasoline prices may be playing a special role in the current cycle, some analysts say.

A cause-effect relationship can't be proved, but gains in home prices began slowing as gas moved above $2 per gallon and beyond, according to one new report called "Driven to the Brink."

Rising energy prices pinch all consumers and thus have some effect on the housing market in general. But gas prices have bigger implications for the value of homes far from a city center.

"Where there was any kind of consistent pattern, it was the case that the further you went from downtown, the greater was the decline in housing prices," says Joe Cortright of consulting firm Impresa, who conducted the study for the group CEOs for Cities.

Although not every city follows the trend, the pattern holds for metro areas as diverse as Tampa; Pittsburgh; Chicago; and Portland, Ore., where Mr. Cortright is based.

Another geographic story is unfolding along boundary lines based on income. Some of the neighborhoods most affected by foreclosures are poorer ones, where access to credit was scarce in the past.

"You're looking at three to four houses on a block going into foreclosure," says Michael van Zalingen of Neighborhood Housing Services, a nonprofit group in Chicago.

What prompted the influx of money before? It was a shift that happened far from the affected neighborhoods.

Bankers on Wall Street found growing global demand for investments built on the income stream from mortgages. The products were structured in such a way that, for a long time, the risk of borrower default seemed small.

The result: a big incentive for mortgage brokers to write more loans. And the biggest opportunity to do that, many found, was in places where lenders had traditionally been wary.

"ZIP Codes where the income growth was relatively negative were actually having much higher house price appreciation and much higher mortgage originations," says Amir Sufi, a finance expert at the University of Chicago's Graduate School of Business.

Very often, those ZIP Codes are ones with many low-income or minority residents, says Mr. Sufi, who recently published an analysis of the credit surge with university colleague Atif Mian.

The housing bust's uneven geographic distribution has important implications. It means that, even though an economic slowdown is under way nationally, some neighborhoods feel it more than others.

Several foreclosures on a block or cul-de-sac diminish the value of surrounding properties – a factor that can then contribute to still more loan defaults. Neighborhood quality goes down, and crime generally goes up.

As Washington considers policy responses, geography isn't the central issue. But it is a piece of the puzzle.

The main responses have a nationwide focus – such as how to encourage lenders to write down the balance on troubled loans. Geography may come into play in smaller but significant ways:

•Congress is considering channeling money to the local level, so that state or city governments can implement programs to buy foreclosed properties in some of the most distressed areas. The result might be fewer vacant homes and new affordable-housing units.

•Boston is one example of how some cities are moving on their own to buy and redevelop vacant homes. The move by Mayor Thomas Menino came after the Boston Herald featured a story about one foreclosure-blighted street.

•Communities with higher loan defaults may need more funding for community-based nonprofit groups – which can help borrowers and lenders find the best options. This issue is also on Congress's radar.

At the Home Ownership Resource Center in Fort Myers, Fla., director Eddie Felton says he'd like to hire more trained counselors as he tries to reach out to the city's many at-risk borrowers.

"We don't believe in two things here – foreclosure and bankruptcy," he says. "We feel that we can work it out."