Socio Economic Determinants of Residential Foreclosures in Bloomington-Normal and Peoria, IL

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1 Socio Economic Determinants of Residential Foreclosures in Bloomington-Normal and Peoria, IL Student Researchers: Benjamin Aberle, Jonathan Bates, and Matthew Bishop Faculty Adviser: Diego Mendez Carbajo, Ph.D. Extended Outline March 2014 Introduction This is part of a multi-year research project, spanning multiple counties in Central Illinois, focused on the analysis of socioeconomic patterns related to residential foreclosures. During the summer of 2013 data on McLean and Peoria Counties were compiled and analyzed; in the summer of 2014 we will do the same for Champaign and Sangamon Counties. The background to the recession is well-known: the collapse of certain real estate markets undermined the solvency of key financial institutions and resulted in a nationwide economic contraction -the deepest and longest since Declines in property values and rise in unemployment increased mortgage defaults and foreclosures: Nationwide, mortgage defaults peaked at 9.7% in late 2009 During the first quarter of 2010 there was one foreclosure every two days in McLean County and two foreclosures every day in Peoria County McLean and Peoria Counties are very different in geographical size yet fairly similar in population size, each being the center of its own U.S. Census Metropolitan Statistical Area (MSA). Their ratio of population to housing units and the median value of owner-occupied housing units are also very similar. This research project combines econometric analysis with geographical information systems and has proven to be a valuable policy-making asset for several local organizations awarded portions of the 2012 National Foreclosure Settlement. Socio Economic Determinants of Residential Foreclosures in Bloomington-Normal and Peoria, IL. 1/6

2 Data The County Recorder s Office records two critical steps of every foreclosure process: The first one is the issuing of the Lis Pendens notice that a homeowner receives after three consecutive months of non payment of her/his mortgage. Although only a fraction of mortgage defaults result in a foreclosure a Lis Pendens notice effectively starts that process. If and when the property is actually foreclosed, it is sold at public auction. The deed of this sale is also recorded by the County Recorder s Office. We have compiled a database of all the residential foreclosures recorded in McLean County and Peoria County between January 2006 and April From those, we have identified the residential foreclosures registered in the Bloomington Normal metropolitan area (a total of 811) and in the City of Peoria (a total of 2,806). For each foreclosure we recorded the date of the auction sale and the address of the property. The number of monthly foreclosures in Central Illinois seems to have peaked in 2010 although the series, even as a three-month moving average, are too volatile to draw a firm conclusion on this regard. Next, a Geographical Information Systems consultant geo located each foreclosure on county wide maps. These maps show that, over time, residential foreclosures concentrate in very specific neighborhoods: the South West of Bloomington and the East Bluff in Peoria. These maps can be accessed at Finally, we collected the area s socio economic indicators compiled through the U.S. Census American Community Survey. This survey sampled households from different areas of McLean and Peoria Counties in order to generate reliable descriptions of population blocks. We collected data describing housing conditions (e.g. number of housing units, percentage of owner occupied homes); economics (e.g. average median household income, cost of homeownership, employment status); education (e.g. percentage of population whose highest level of educational attainment is a high school / some college / bachelor s degree); and racial/ethnic composition (e.g. percentage of Caucasian / African American / Hispanic / Asian population). The American Community Survey provides socio economic information about 108 separate population blocks in McLean County and 141 separate population blocks in Peoria County. Our analysis focuses on the 71 survey blocks overlapping the geographical boundaries of Bloomington Normal and on the 98 survey blocks overlapping the geographical boundaries of the City of Peoria. Socio Economic Determinants of Residential Foreclosures in Bloomington-Normal and Peoria, IL. 2/6

3 Methods We use Ordinary Least Squares to estimate the parameters of a linear regression model attempting to discern the relationship between the number of foreclosures among homeowners in any particular U.S. Census survey block and their socio economic characteristics. Because we are working with survey data the usual caveats about the margins of error associated with extrapolating our findings to either the county as a whole or to individual households must be kept in mind. Results The results of our statistical analysis efforts [See Table 1 and Table 2] indicate that, in both McLean and Peoria Counties: The higher the financial stress of homeownership, measured as the fraction of the average median income that a household devotes to paying a home mortgage principal, interests, taxes and insurance, the more likely a homeowner is to undergo a foreclosure process. This factor, as could be expected, is the single largest contributor to an outcome of foreclosure. Next, in order of magnitude, is the racial/ethnic composition of the U.S. Census block. In Bloomington Normal an increased presence of Hispanic residents in any given survey block decreases the average number of foreclosures among homeowners. In the City of Peoria an increased presence of African American residents in any given survey block increases the average number of foreclosures among homeowners. Low levels of educational attainment, measured as the fraction of the population having completed only a high school education, are associated with larger numbers of foreclosures. This relationship between the educational attainment of the census blocks residents and the average number of foreclosures among homeowners is of a higher order of magnitude than the one found between the average median income of the census blocks residents and the average number of foreclosures among homeowners. Finally, the weakest association is between the fraction of residents who are either employed or unemployed in the census block and the average number of foreclosures among homeowners. Not only is this relationship between employment status and foreclosures statistically tenuous, it also changes signs between Bloomington Normal and the City of Peoria. Socio Economic Determinants of Residential Foreclosures in Bloomington-Normal and Peoria, IL. 3/6

4 In Bloomington Normal a larger proportion of employed residents in the census block is associated with a smaller number of foreclosures among homeowners. In the City of Peoria a smaller proportion of unemployed residents is associated with a larger number of foreclosures among homeowners. Conclusions We found that in Bloomington-Normal and Peoria, IL: The financial stress of homeownership is the most relevant factor helping to explain foreclosures. Low levels of educational attainment are associated with more frequent foreclosures. Employment status plays different roles across counties. A potential policy implication of this study would be to tailor the foreclosure mediation processes established in Peoria County (June 2011) and McLean County (March 2012) to the average level of educational attainment of the homeowners. Also, efforts to promote employment -as a strategy to sustain homeownership, receive a mixed endorsement from this study. As future avenues of research we will explore the relationship between the time it takes to foreclose a property and other factors such as the value of the mortgage and the socioeconomic characteristics of the homeowners. Acknowledgements Sarah Kolbe, GIS Consultant The staff at the Peoria and McLean Counties Recorder and GIS Offices Deborah Halperin, Director of the Action Research Center at Illinois Wesleyan University Contact Information Diego Méndez-Carbajo Associate Professor of Economics Illinois Wesleyan University P.O. Box 2900 Bloomington, IL dmendez@iwu.edu Socio Economic Determinants of Residential Foreclosures in Bloomington-Normal and Peoria, IL. 4/6

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