Analysis of Neighborhood Stabilization Program shows Mixed Results
The Neighborhood Stabilization Program (NSP) was designed to arrest the negative spillover effects from the recent national housing foreclosure crisis. The underlying fear was the “contagion effect” of foreclosures—the rash of foreclosures would reduce the sales price or assessed value of neighboring homes or send a negative signal about the future stability of the neighborhoods.
Between 2008 and 2010, Congress authorized $6.9 billion in three separate enactments to create and support NSP (commonly referred to as NSP1, NSP2, and NSP3). Abt Associates evaluated the second round of NSP funding (NSP2), which distributed $1.9 billion to grantees for investments in properties in the hardest hit neighborhoods, and released its findings in a new report entitled, The Evaluation of the Neighborhood Stabilization Program.
The study’s findings provide little evidence that NSP2 activities significantly affected key neighborhood outcomes. At the neighborhood level, price increases were modest among neighborhoods within the seven largest counties that received intensive NSP2 treatment, but the effects differed considerably across counties. At the property-level, the cumulative effect of NSP2 activities was to transition investor-owned properties to homeowner-occupied units, and in one county there was evidence that NSP2 activities reduced property and violent crime. The study did not find any systematic, property-level effect of NSP2 on nearby housing sale prices.
Why Was There No Measurable Spillover Effect?
The scale of investment was small relative to the size of the problem in targeted neighborhoods. NSP2 grantees in the 19 study counties targeted some of the most financially distressed tracts in their counties. On average, NSP2 treated seven properties per tract, when the average NSP2 census tract contained 1,715 housing units and 58 financially distressed properties. NSP2 tracts also had much higher rates of vacant properties, investor-owned properties, and high-cost mortgage loans. Residents of NSP2 tracts had much lower levels of income and educational attainment, and many grantees reported that the neighborhood problems went beyond housing and included poor schools, crime, and high rates of unemployment. The scale of the NSP2 investments may have been too small to overcome these formidable challenges.
- NSP2 investments may not have been sufficiently concentrated within census tracts. The average distance between an NSP2 property and the five closest NSP2 properties in a typical NSP2 tract was more than 0.5 mile. Overcoming the scale of financial distress wrought by the foreclosure crisis and subsequent recession may have required greater geographic concentration of NSP2 investments. When asked why they did not achieve greater concentration, grantees pointed to the speed with which they needed to acquire properties to meet the NSP2 expenditure deadlines and the challenges they faced in finding properties in financial distress that were available for purchase. The robo-signing scandal of 2011 slowed down many banks’ foreclosure processes just as NSP2 grantees were beginning to look for properties to acquire. In other cases, banks wary of their ability to resell foreclosed properties delayed foreclosure to avoid taking ownership.
- NSP2 grantees had to be opportunistic in their selection of properties. Grantees in some markets reported that investor competition limited their ability to acquire properties at the one percent discount required by the program, which increased their need to acquire properties that required more substantial rehabilitation and properties located in areas with less investor interest. NSP2’s expenditure deadlines hampered grantees’ ability to wait for strategic acquisitions.
- February 2013 (when 100 percent of NSP2 funds had to be expended) may have been too early to detect the effects of NSP2. Only 4,612 of the 6,354 properties with NSP2 investments in the 19 study counties were considered completed by the end of the program. Among the completed properties, 1,006 properties had been completed within the three months before February 2013, and many of these had not been resold or leased by the first quarter of 2013, when the study period ended. The most recent outcomes described in the study were measured at a point in time when nearly 27 percent of the property investments were not complete or had just been completed. The impacts of these NSP2 properties on nearby housing values are unlikely to be captured by the study if (1) there was a lag between the completion of NSP2 investments and the effects on housing values or (2) if the effects were triggered by the completion of the investment activities, rather than the “signaling” effects of starting the investment.
- Different activities may have led to conflicting price effects in the short term. NSP2 activities had complex and sometimes conflicting price effects, especially in the short term. For example, demolition removed properties from the housing stock, whereas development of homeownership units on vacant properties or properties in the foreclosure process added to it. Although both activities sought to improve neighborhood stability over the long run, adding to the supply of available units with rehabilitated and redeveloped properties may have reduced the value of nearby homes by giving prospective homebuyers more purchasing options and forcing sellers to reduce their prices to remain competitive. These conflicting price effects meant that NSP2 did not have a clear, expected effect on prices, and the impact may have varied based on the mix of activities in each county.
- The property-selection process created methodological challenges for measuring impacts. Grantees’ selection of properties was influenced by limitations on the supply of available properties, competition from investors, and pressures created by NSP2’s expenditure deadlines and one percent discount requirement. To the extent that these factors affected grantees’ selection of properties, they create unobserved differences between NSP2 properties and other properties that might have been used as a comparison group. This selection created methodological challenges for measuring the impact of NSP2 activities on home prices at the property level.