Korene's Blog

A recent study shows a direct link between car ownership in a given neighborhood and mortgage foreclosure rates.

The Natural Resources Defense Council conducted the study, "Location Efficiency and Mortgage Default," by comparing 40,000 mortgages in Chicago, San Francisco, and Jacksonville, Fla., along with U.S. Census data on neighborhood conditions, incomes, and car ownership.

The study found that, as the average number of vehicles per household in a neighborhood rises, so does the probability of foreclosure, after controlling for income.

"Add urban sprawl to the list of sources for our current financial mess," said David Goldstein, co-director of the nonprofit public health and environmental advocacy organization's Energy Program.

"It was not just predatory lending or lax standards. The connection between transportation costs and mortgage default cannot be ignored. The sooner we address it in our lending and development practices, the sooner we will start to see a more stable real estate sector."

The council defines location efficiency as a measure of the transportation costs in a given area. Transportation costs accounted for 17 percent of Americans' average annual household expenditures in 2008, according to the U.S. Bureau of Labor Statistics. Those without cars or with fewer cars would save money on vehicle lease or purchase costs, maintenance, gas, insurance and parking, the council said.

Due to higher energy costs, homebuyers are increasingly factoring in commuting costs and energy efficiency when purchasing a home, according to the National Association of Realtors. Commuting costs and heating and cooling costs were at least "somewhat important" to 78 percent and 88 percent of homebuyers, respectively, according to the association's 2009 Profile of Home Buyers and Sellers.

The real cost of housing should be calculated as a combination of mortgage and transportation costs, the council said. The rate of vehicle ownership, which reflects neighborhood compactness, walkability and access to public transit, is "key to predicting mortgage performance," and both urban planners and mortgage underwriters should change their policies accordingly, the council said.

"In all three cities, the results were the same -- if your only choice is to drive, you have much less economic flexibility -- flexibility that can protect you from foreclosure in tough times," said Jennifer Henry, real estate sector manager in the council's Center for Market Innovation.

"Knowing that now, aggressive investment in public transportation and walkable communities makes even more sense. And investing in transit will not just improve our economy by avoiding future foreclosures -- but create jobs to get things humming right now."

If mortgage lenders take into account a location's transportation costs, they would more accurately be able to gauge the borrower's ability to afford the home, the council said.

It gave the example of two hypothetical borrowers in Chicago: Both have credit scores of 680, a total debt-to-income ratio of 41 percent, and a home-to-value ratio of 80 percent. But one borrower lives in a neighborhood where the median vehicle ownership per household is one car per $33,000 of household income and the other lives in a neighborhood where that ratio is one car per $58,000 of household income.

The first has a 9.9 percent risk of foreclosure; the second, a 7.2 percent chance. That means that even if the second borrower has a debt-to-income ratio up to 62.5 percent, changing nothing else, that borrower's risk of foreclosure will be the same as the second borrower.

Location efficiency also helps maintain home values, the study said, pointing to an August 2009 study that showed that homes in neighborhoods where goods, services and fun things to do are located within walking distance can command a price premium of $4,000 to $34,000 over otherwise similar homes in less walkable areas (see story).

Based on the results of its study, in addition to changes in mortgage underwriting, the council recommended that land-use planners put "smart growth" policies in place that encourage more compact urban development, invest in areas that have already been developed and preserve open space, and improve public transit systems as well as bicycle- and pedestrian-friendly infrastructure.

Policies to reduce dependence on automobiles would also provide great benefits to the environment, including land conservation, a reduction in watershed pollution, and lower carbon dioxide emissions, the council said.