IDEAS home Printed from https://ideas.repec.org/a/bla/reesec/v49y2021i3p876-916.html
   My bibliography  Save this article

Foreclosure Externalities and Home Liquidity

Author

Listed:
  • Xun Bian
  • Raymond Brastow
  • Bennie Waller
  • Scott Wentland

Abstract

We study the external impact of foreclosures, exploring how foreclosed properties affect the liquidity of nearby homes. Empirically, we find a foreclosure increases a nearby home's time‐on‐market by approximately 30% on average, which is primarily driven by a disamenity effect. There is evidence that this delay comes from surprises or information shocks to nearby sellers, as foreclosures that come on and/or leave the market after a nearby home's listing date have the largest adverse liquidity effects. However, when there is no surprise and a nearby foreclosure remains through the entire marketing period, sellers discount list prices more steeply, effectively counteracting these liquidity effects. The results suggest that information, pricing and expectations play key roles in how this externality is absorbed by the real estate market.

Suggested Citation

  • Xun Bian & Raymond Brastow & Bennie Waller & Scott Wentland, 2021. "Foreclosure Externalities and Home Liquidity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 876-916, September.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:3:p:876-916
    DOI: 10.1111/1540-6229.12301
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1540-6229.12301
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1540-6229.12301?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
    2. Geoffrey K. Turnbull & Velma Zahirovic‐Herbert, 2011. "Why Do Vacant Houses Sell for Less: Holding Costs, Bargaining Power or Stigma?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(1), pages 19-43, March.
    3. Zhenguo Lin & Kerry D. Vandell, 2007. "Illiquidity and Pricing Biases in the Real Estate Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(3), pages 291-330, September.
    4. Elliot Anenberg & Edward Kung, 2014. "Estimates of the Size and Source of Price Declines Due to Nearby Foreclosures," American Economic Review, American Economic Association, vol. 104(8), pages 2527-2551, August.
    5. Rutherford, R.C. & Springer, T.M. & Yavas, A., 2005. "Conflicts between principals and agents: evidence from residential brokerage," Journal of Financial Economics, Elsevier, vol. 76(3), pages 627-665, June.
    6. Scott Wentland & Bennie Waller & Raymond Brastow, 2014. "Estimating the Effect of Crime Risk on Property Values and Time on Market: Evidence from Megan's Law in Virginia," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(1), pages 223-251, March.
    7. James J. Heckman & Christopher R. Taber, 1994. "Econometric Mixture Models and More General Models for Unobservables in Duration Analysis," NBER Technical Working Papers 0157, National Bureau of Economic Research, Inc.
    8. A. Colin Cameron & Douglas L. Miller, 2015. "A Practitioner’s Guide to Cluster-Robust Inference," Journal of Human Resources, University of Wisconsin Press, vol. 50(2), pages 317-372.
    9. Geoffrey Turnbull & Jonathan Dombrow, 2006. "Spatial Competition and Shopping Externalities: Evidence from the Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 391-408, June.
    10. Ping Cheng & Zhenguo Lin & Yingchun Liu, 2008. "A Model of Time‐on‐Market and Real Estate Price Under Sequential Search with Recall," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 813-843, December.
    11. Gerardi, Kristopher & Rosenblatt, Eric & Willen, Paul S. & Yao, Vincent, 2015. "Foreclosure externalities: New evidence," Journal of Urban Economics, Elsevier, vol. 87(C), pages 42-56.
    12. Velma Zahirovic-Herbert & Geoffrey Turnbull, 2008. "School Quality, House Prices and Liquidity," The Journal of Real Estate Finance and Economics, Springer, vol. 37(2), pages 113-130, August.
    13. W. Scott Frame, 2010. "Estimating the effect of mortgage foreclosures on nearby property values: a critical review of the literature," Economic Review, Federal Reserve Bank of Atlanta, vol. 95(3).
    14. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    15. Pope, Jaren C., 2008. "Fear of crime and housing prices: Household reactions to sex offender registries," Journal of Urban Economics, Elsevier, vol. 64(3), pages 601-614, November.
    16. Abdullah Yavas & Shiawee Yang, 1995. "The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(3), pages 347-368, September.
    17. Ronald Rutherford & Abdullah Yavas, 2012. "Discount Brokerage in Residential Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40(3), pages 508-535, September.
    18. Brinch, Christian N., 2007. "Nonparametric Identification Of The Mixed Hazards Model With Time-Varying Covariates," Econometric Theory, Cambridge University Press, vol. 23(2), pages 349-354, April.
    19. Geoffrey K. Turnbull & Bennie D. Waller & Scott A. Wentland & Walter R. T. Witschey & Velma Zahirovic-Herbert, 2019. "This Old House: Historical Restoration as a Neighborhood Amenity," Land Economics, University of Wisconsin Press, vol. 95(2), pages 193-210.
    20. Jeffrey P. Cohen & Cletus C. Coughlin & Vincent W. Yao, 2016. "Sales of Distressed Residential Property: What Have We Learned from Recent Research?," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 159-188.
    21. James Vaupel & Kenneth Manton & Eric Stallard, 1979. "The impact of heterogeneity in individual frailty on the dynamics of mortality," Demography, Springer;Population Association of America (PAA), vol. 16(3), pages 439-454, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lingxiao Li & Abdullah Yavas & Bing Zhu, 2023. "Externalities of residential property flipping," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(1), pages 233-271, January.
    2. David H. Downs & Bing Zhu, 2022. "Property market liquidity and REIT liquidity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(6), pages 1462-1491, November.
    3. Suzuki, Masatomo & Hino, Kimihiro & Muto, Sachio, 2022. "Negative externalities of long-term vacant homes: Evidence from Japan," Journal of Housing Economics, Elsevier, vol. 57(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bian, Xun & Waller, Bennie D. & Turnbull, Geoffrey K. & Wentland, Scott A., 2015. "How many listings are too many? Agent inventory externalities and the residential housing market," Journal of Housing Economics, Elsevier, vol. 28(C), pages 130-143.
    2. Geoffrey K. Turnbull & Bennie D. Waller & Scott A. Wentland, 2022. "Mitigating agency costs in the housing market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 829-861, September.
    3. Xun Bian & Justin C. Contat & Bennie D. Waller & Scott A. Wentland, 2023. "Why Disclose Less Information? Toward Resolving a Disclosure Puzzle in the Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 443-486, February.
    4. Randy Anderson & Raymond Brastow & Geoffrey Turnbull & Bennie Waller, 2014. "Seller Over-Pricing and Listing Contract Length: The Effects of Endogenous Listing Contracts on Housing Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 49(3), pages 434-450, October.
    5. An, Zhiyong & Cheng, Ping & Lin, Zhenguo & Liu, Yingchun, 2013. "How do market conditions impact price-TOM relationship? Evidence from real estate owned (REO) sales," Journal of Housing Economics, Elsevier, vol. 22(3), pages 250-263.
    6. Nicholas B. Irwin & Mitchell R. Livy, 2022. "Price and Liquidity Dynamics for Single and Multi-Family Homes during Housing Market Shocks," The Journal of Real Estate Finance and Economics, Springer, vol. 65(1), pages 22-47, July.
    7. Xun Bian & Geoffrey K. Turnbull & Bennie D. Waller, 2017. "Client Externality Effects of Agents Selling Their Own Properties," The Journal of Real Estate Finance and Economics, Springer, vol. 54(2), pages 139-164, February.
    8. Velma Zahirovic-Herbert & Bennie D. Waller & Geoffrey K. Turnbull, 2020. "Properties that Sell at or above Listing Price: Strategic Pricing, Better Broker or Just Dumb Luck?," The Journal of Real Estate Finance and Economics, Springer, vol. 60(1), pages 53-76, February.
    9. Gerardi, Kristopher & Rosenblatt, Eric & Willen, Paul S. & Yao, Vincent, 2015. "Foreclosure externalities: New evidence," Journal of Urban Economics, Elsevier, vol. 87(C), pages 42-56.
    10. Scott Wentland & Bennie Waller & Raymond Brastow, 2014. "Estimating the Effect of Crime Risk on Property Values and Time on Market: Evidence from Megan's Law in Virginia," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(1), pages 223-251, March.
    11. Sumit Agarwal & Michael J. Seiler & Ralph Siebert, 2022. "Do as Essay, Not as I Do? How Inflated List Prices of Unsold Essayer Homes Affect the Price Discovery Process," CESifo Working Paper Series 10069, CESifo.
    12. Anthony Yezer & Yishen Liu, 2017. "Can Differences Deceive? The Case of “Foreclosure Externalities"," Working Papers 2017-29, The George Washington University, Institute for International Economic Policy.
    13. Jeffrey P. Cohen & Cletus C. Coughlin & Vincent W. Yao, 2016. "Sales of Distressed Residential Property: What Have We Learned from Recent Research?," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 159-188.
    14. Han, Lu & Strange, William C., 2015. "The Microstructure of Housing Markets," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 813-886, Elsevier.
    15. Darren K. Hayunga & Henry J. Munneke, 2021. "Examining Both Sides of the Transaction: Bargaining in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(2), pages 663-691, June.
    16. Anthony Yezer, 2016. "Testing the Association between Foreclosure and Nearby House Values: Can Differences Deceive?," Working Papers 2016-29, The George Washington University, Institute for International Economic Policy.
    17. Irwin, Nicholas & Wolf, David, 2022. "Time is money: Water quality's impact on home liquidity and property values," Ecological Economics, Elsevier, vol. 199(C).
    18. Yishen Liu & Anthony M. Yezer, 2021. "Foreclosure Externalities: Have We Confused the Cure with the Disease?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 428-460, September.
    19. Biswas, Arnab & Cunningham, Chris & Gerardi, Kristopher & Sexton, Daniel, 2021. "Foreclosure externalities and Vacant Property Registration Ordinances," Journal of Urban Economics, Elsevier, vol. 123(C).
    20. Michele Loberto, 2023. "Foreclosures and House Prices," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(1), pages 397-424, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reesec:v:49:y:2021:i:3:p:876-916. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/areueea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.