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Foreclosure externalities: Some new evidence

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  • Kristopher Gerardi
  • Eric Rosenblatt
  • Paul S. Willen
  • Vincent W. Yao

Abstract

In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

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File URL: http://www.frbatlanta.org/documents/pubs/wp/wp1211.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2012-11.

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Date of creation: 2012
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Handle: RePEc:fip:fedawp:2012-11

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  1. Daniel Hartley, 2010. "The effect of foreclosures on nearby housing prices: supply or disamenity?," Working Paper 1011, Federal Reserve Bank of Cleveland.
  2. 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.
  3. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  4. Dan Immergluck & Geoff Smith, 2005. "The impact of single-family mortgage foreclosures on neighborhood crime," Proceedings, Federal Reserve Bank of Chicago, issue Apr.
  5. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2009. "Decomposing the foreclosure crisis: House price depreciation versus bad underwriting," Working Paper 2009-25, Federal Reserve Bank of Atlanta.
  6. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers 2004-022, Federal Reserve Bank of St. Louis.
  7. 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.
  8. Leigh Linden & Jonah E. Rockoff, 2008. "Estimates of the Impact of Crime Risk on Property Values from Megan's Laws," American Economic Review, American Economic Association, vol. 98(3), pages 1103-27, June.
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