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Estimating the effect of mortgage foreclosures on nearby property values: a critical review of the literature

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  • W. Scott Frame

Abstract

In response to the wave of residential mortgage foreclosures in the past few years, federal, state and local government intervention programs have aimed to reduce the presumed social costs of foreclosures. Before the recent crisis, there was little economic research documenting foreclosure spillover effects. ; This article takes a critical look at the recent literature that seeks to estimate the negative effects of residential mortgage foreclosures. This review suggests that foreclosed properties sell at a discount, likely because such properties are in worse condition than surrounding properties. What's more, very nearby foreclosures appear to depress the sales prices of nondistressed properties, but this effect diminishes rapidly over physical distance and time ; The author suggests that the considerable variation in foreclosure discount and spillover estimates that occurs from study to study may be related to data limitations (specific places and times) and poorly specified empirical models in some studies. He notes that studies using a repeat-sales approach seem to hold greater promise than those using hedonic regressions; the former approach is more likely to hold property and neighborhood characteristics constant and make it easier to examine multiple geographies and longer time periods.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2010)
Issue (Month): ()
Pages:

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Handle: RePEc:fip:fedaer:y:2010:n:v.95no.3

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  1. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-31, August.
  2. William H. Rogers & William Winter, 2009. "The Impact of Foreclosures on Neighboring Housing Sales," Journal of Real Estate Research, American Real Estate Society, vol. 31(4), pages 455-480.
  3. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers 2004-022, Federal Reserve Bank of St. Louis.
  4. Kristopher Gerardi & Wenli Li, 2010. "Mortgage foreclosure prevention efforts," Economic Review, Federal Reserve Bank of Atlanta.
  5. Larry Cordell & Karen Dynan & Andreas Lehnert & Nellie Liang & Eileen Mauskopf, 2009. "Designing loan modifications to address the mortgage crisis and the making home affordable program," Finance and Economics Discussion Series 2009-43, Board of Governors of the Federal Reserve System (U.S.).
  6. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
  7. Harding, John P. & Rosenblatt, Eric & Yao, Vincent W., 2009. "The contagion effect of foreclosed properties," Journal of Urban Economics, Elsevier, vol. 66(3), pages 164-178, November.
  8. John R. Knight, 2002. "Listing Price, Time on Market, and Ultimate Selling Price: Causes and Effects of Listing Price Changes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(2), pages 213-237.
  9. Zhenguo Lin & Eric Rosenblatt & Vincent Yao, 2009. "Spillover Effects of Foreclosures on Neighborhood Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 387-407, May.
  10. Tammy Leonard & James Murdoch, 2009. "The neighborhood effects of foreclosure," Journal of Geographical Systems, Springer, vol. 11(4), pages 317-332, December.
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Cited by:
  1. Higgins, Eric & Calomiris, Charles, 2011. "Policy Briefings: Are Delays to the Foreclosure Process a Good Thing?," Working paper 641, Regulation2point0.
  2. Johnson, Michael P. & Solak, Senay & Drew, Rachel Bogardus & Keisler, Jeffrey, 2013. "Property value impacts of foreclosed housing acquisitions under uncertainty," Socio-Economic Planning Sciences, Elsevier, vol. 47(4), pages 292-308.

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