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The price of ignorance: Foreclosures, uninformed buyers and house prices

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  • Turnbull, Geoffrey K.
  • van der Vlist, Arno J.

Abstract

Uninformed buyers may pay more when purchasing complex assets, such as houses. This paper compares local house buyers who are later foreclosed with those not foreclosed for various buyer-types, namely, owner-occupier households, investor-companies, second-home buyers, and small-scale investors. Data from one of the foreclosure epicenters, Orange County, Florida, reveal that subsequent foreclosures are associated with higher prices for comparable housing at the time of purchase. The premium paid by buyers between 2000 and 2007 who experience foreclosure after 2007 is larger closer to the 2007 market peak, approaching 3 percent. We find considerable heterogeneity across buyer-types. In particular, foreclosed second-home buyers and small-scale investors systematically pay more, while investor-companies and owner-occupiers do not. The pattern is consistent with the hypothesis that the premium paid by foreclosed households reflects poor information or limited financial acumen.

Suggested Citation

  • Turnbull, Geoffrey K. & van der Vlist, Arno J., 2022. "The price of ignorance: Foreclosures, uninformed buyers and house prices," Journal of Housing Economics, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:jhouse:v:57:y:2022:i:c:s1051137722000183
    DOI: 10.1016/j.jhe.2022.101844
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    More about this item

    Keywords

    Uninformed buyers; Asymmetric information; House price; Investors; Second-home owners; Foreclosure;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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