I see your estimate, and I raise it

The subprime mortgage mess is growing worse by leaps and bounds! (Or maybe not.)

Over the last month, expert estimates of the damage to property values caused by foreclosures have climbed from $103 billion over the next two years to $519 billion next year alone.

First came an October 25 report (here) from Democrats in Congress estimating foreclosures would reduce property values nationwide by $103 billion by the end 2009.

Then on November 13 the Center for Responsible Lending, an advocacy group, estimated (here) foreclosures would chop $223 billion from property values by the end of 2009.

Now comes a report by Global Insight for the U.S. Conference of Mayors (here) estimating the actual reduction in property values will be $519 billion – by the end of 2008.

All the estimates are based on a study of housing prices in Chicago in the late 1990s (here) that found foreclosures tended to reduce the property values of surrounding homes. The likely mechanisms: Foreclosed homes sell at markdowns, undercutting demand for other homes, and foreclosures tend to fray the fabric of the neighborhood, diminishing buyer interest.

It's a landmark study, widely cited and highly regarded, but no one has any data on what's happening to property values now -- or in the last decade. The difference between the widely divergent estimates in the recent reports? Just a matter of what multipliers you choose.