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Foreclosure Discount: Definition and Dynamic Patterns

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  • Hanqing Zhou
  • Yuan Yuan
  • Christopher Lako
  • Michael Sklarz
  • Charles McKinney

Abstract

type="main"> The lack of a consistent definition of foreclosure discount gives rise to discount rates that vary from nonexistent to sizeable across locations and time. We define the foreclosure discount as the discount of the real estate owned (REO) sale price relative to a normal-sale estimated market value. With a dataset of 1.34 million REO sale transactions, across 16 CBSAs between 2000 and 2012, we find three noteworthy empirical findings. First, a high REO sale concentration in a market increases the foreclosure discount. Second, foreclosure discount is negatively related to recent house-price appreciation. Third, the often reported high foreclosure discount for lower value properties is likely due to property condition.

Suggested Citation

  • Hanqing Zhou & Yuan Yuan & Christopher Lako & Michael Sklarz & Charles McKinney, 2015. "Foreclosure Discount: Definition and Dynamic Patterns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(3), pages 683-718, September.
    • Handle: RePEc:bla:reesec:v:43:y:2015:i:3:p:683-718
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    File URL: http://hdl.handle.net/10.1111/1540-6229.12089
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    References listed on IDEAS

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    1. Stephanie Y. Rauterkus & Norman G. Miller & Grant I. Thrall & Michael A. Sklarz, 2012. "Foreclosure Contagion and REO versus non-REO Sales," International Real Estate Review, Global Social Science Institute, vol. 15(3), pages 307-324.
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    4. Harding, John P. & Rosenblatt, Eric & Yao, Vincent W., 2012. "The foreclosure discount: Myth or reality?," Journal of Urban Economics, Elsevier, vol. 71(2), pages 204-218.
    5. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
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    8. Terrence M. Clauretie & Nasser Daneshvary, 2009. "Estimating the House Foreclosure Discount Corrected for Spatial Price Interdependence and Endogeneity of Marketing Time," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(1), pages 43-67, March.
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    Cited by:

    1. Shu Ling Chiang & Ming Shann Tsai & Shan Jiang, 2021. "The Influences of Foreclosure Factors on the Value, Yield, Duration and Convexity of a Mortgage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 361-394, September.
    2. Marcus T. Allen & Justin D. Benefield & Christopher L. Cain & Norman Maynard, 2024. "Distressed Property Sales: Differences and Similarities Across Types of Distress," The Journal of Real Estate Finance and Economics, Springer, vol. 68(2), pages 318-353, February.
    3. Donner, Herman & Song, Han-Suck & Wilhelmsson, Mats, 2016. "Forced sales and their impact on real estate prices," Journal of Housing Economics, Elsevier, vol. 34(C), pages 60-68.
    4. James N. Conklin & N. Edward Coulson & Moussa Diop, 2023. "Distressed comps," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(1), pages 170-195, January.
    5. Donner, Herman, 2017. "Determinants of a Foreclosure Discount," Working Paper Series 17/2, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    6. Conklin, James N. & Edward Coulson, N. & Diop, Moussa & Mota, Nuno, 2023. "An Alternative Approach to Estimating Foreclosure and Short Sale Discounts," Journal of Urban Economics, Elsevier, vol. 134(C).

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