There Goes the Neighborhood

In exurbs and fringe cities, the mortgage crisis is having a domino effect

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In Three Lakes, Florida, an unincorporated area of Miami-Dade County lying on the western fringe of the city’s sprawl, sits a two-block cul-de-sac of generously sized houses with identical Spanish-tile roofs, packed so tightly that their eaves almost touch. The houses on the north side of the street border one of the many man-made lakes that dot the area, by-products of the efforts to drain swampland for development. To the west, roads run through a patch of empty land adorned only by billboards for three new communities planned by Monaco Developers, which would like to sell you a house.

It’s a pretty typical piece of aspirational America: two cars (or more) in every driveway. The driveways, that is, that aren’t empty. On a rainy day in November, two houses on the cul-de-sac had for sale signs out front (though it turns out more were in fact for sale). In front of another, a pile of furniture sat soaking in the downpour. According to data provided by RealtyTrac, a business that tracks foreclosures for real-estate professionals and investors, 10 of the 45 homes on the street received foreclosure filings in the third quarter of 2007 alone. (Such filings range from notices that a loan is in substantial default to notices of auction or repossession by the lender.) Three of the 10 had just been purchased—two in February, one in July. On average, the 10 homes had been owned for just 22 months before foreclosure.

As the collapse of the subprime mortgage market roils the economy, it is in places like Three Lakes—the fast-growth fringes of America’s metro areas—where much of the trouble is originating. Most of Miami-Dade County’s 29,923 foreclosures in the first three quarters of 2007 occurred on its outer fringes. In Clark County, Nevada, where nearly one in 20 homes is in foreclosure, the worst damage has likewise been done in a ring around central Las Vegas.

Nationally, the variety of communities facing a wave of foreclosures is striking. Many areas of go-go growth—the Southwest, California’s Central Valley, much of Florida, eastern Colorado, Greater Atlanta—have been hard-hit. So too have portions of the Rust Belt, and a narrow east-west strip running from Tennessee into Arkansas. The places encompass run-down neighborhoods as well as areas with at least a veneer of affluence. (On the street pictured below, many of the houses sold for $400,000 or more.) If nothing else, the meltdown forces us to consider how much uncertainty may lurk beneath the surface of apparent prosperity; an ample suburban house could be an asset or a liability, depending on the terms of the mortgage and the direction of the local market.

At first, the subprime crisis stung two groups in particular—people of modest means who’d gotten in over their heads, and a wealthier crowd, people working at hedge funds and investment houses, who’d trafficked in the first group’s debt, fueling the market for exotic, unstable loans. One might find a measure of rough justice in the travails of the latter group (45 residences in Greenwich, Connecticut, home to many hedge-fund operators and investment bankers, were in foreclosure in the third quarter of 2007). But the ripples from the subprime crisis are now beginning to affect nearly everyone. A cooler housing market chills construction, consumer confidence, retail sales, and all the rest.

Not least, the crisis is harming the neighbors of people in foreclosure, even those who aren’t having trouble making loan payments. According to one academic study, every foreclosure reduces the value of all other houses within an eighth of a mile by about 1 percent, as the sight of vacant property scares off potential buyers. Combine that with a market already in decline, and neighborhoods that begin to have troubles can go off the cliff. On the street pictured, three houses not in foreclosure have been languishing on the market for 72, 97, and 149 days; asking prices along the cul-de-sac vary widely, but average about $40,000 less than the comparable prices in the first two quarters of the year.

Still, the beat, if now more muted, goes on. On Miami’s 99 JAMZ radio station, interspersed with spots for personal-injury lawyers and offers of lump-sum payments in exchange for pensions or legal settlements, an ad touts condos for people who’ve had trouble with credit in the past—just $500 down.

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