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Foreclosures, House Prices, and the Real Economy

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  • Atif Mian

    (University of California, Berkeley and NBER (email: atif@haas.berkeley.edu))

  • Amir Sufi

    (University of Chicago Booth School of Business and NBER (email: amir.sufi@chicagobooth.edu))

  • Francesco Trebbi

    (University of British Columbia, CIFAR, and NBER (email: ftrebbi@interchange.ubc.ca))

Abstract

A central idea in macroeconomic theory is that negative price effects from the leverage-induced forced sale of durable goods can amplify negative shocks and reduce economic activity. We examine this idea by estimating the effect of U.S. foreclosures in 2008 and 2009 on house prices, residential investment, and durable consumption. We show that states that require judicial process for a foreclosure sale have significantly lower rates of foreclosures relative to states that have no such requirement. Using state laws requiring a judicial foreclosure as an instrument for actual foreclosures, as well as a regression discontinuity design around state borders with differing foreclosure laws, we show that foreclosures have a large negative impact on house prices. Foreclosures also lead to a significant decline in residential investment and durable consumption. The magnitudes of the effects are large, suggesting that foreclosures have been an important factor in weak house price, residential investment, and durable consumption patterns during and after the Great Recession of 2007 to 2009.

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File URL: http://www.imes.boj.or.jp/research/papers/english/11-E-27.pdf
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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-27.

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Date of creation: Sep 2011
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Handle: RePEc:ime:imedps:11-e-27

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  1. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  2. Atif Mian & Amir Sufi & Francesco Trebbi, 2008. "The Political Economy of the U.S. Mortgage Default Crisis," NBER Working Papers 14468, National Bureau of Economic Research, Inc.
  3. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  4. Daniel Hartley, 2010. "The effect of foreclosures on nearby housing prices: supply or disamenity?," Working Paper 1011, Federal Reserve Bank of Cleveland.
  5. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-31, August.
  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. Atif Mian & Amir Sufi, 2012. "The Effects of Fiscal Stimulus: Evidence from the 2009 Cash for Clunkers Program," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1107-1142.
  8. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
  9. Deng, Yongheng & Quigley, John M. & Van Order, Robert, 1999. "Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options," Berkeley Program on Housing and Urban Policy, Working Paper Series qt96r560pg, Berkeley Program on Housing and Urban Policy.
  10. Arvind Krishnamurthy, 2009. "Amplification Mechanisms in Liquidity Crises," NBER Working Papers 15040, National Bureau of Economic Research, Inc.
  11. Erik Hurst & Daniel Hartley & Veronica Guerrieri, 2011. "Endogenous Gentrification and Housing Price Dynamics," 2011 Meeting Papers 1418, Society for Economic Dynamics.
  12. Moreira, Marcelo J., 2009. "Tests with correct size when instruments can be arbitrarily weak," Journal of Econometrics, Elsevier, vol. 152(2), pages 131-140, October.
  13. Kristopher S. Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul S. Willen, 2009. "Making sense of the subprime crisis," Working Paper 2009-02, Federal Reserve Bank of Atlanta.
  14. Efraim Benmelech & Mark J. Garmaise & Tobias J. Moskowitz, 2005. "Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 1121-1154, August.
  15. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  16. repec:bla:restud:v:75:y:2008:i:3:p:809-833 is not listed on IDEAS
  17. Karen M. Pence, 2006. "Foreclosing on Opportunity: State Laws and Mortgage Credit," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 177-182, February.
  18. Krishnamurthy, Arvind, 2003. "Collateral constraints and the amplification mechanism," Journal of Economic Theory, Elsevier, vol. 111(2), pages 277-292, August.
  19. Andrews,Donald W. K. & Stock,James H. (ed.), 2005. "Identification and Inference for Econometric Models," Cambridge Books, Cambridge University Press, number 9780521844413.
  20. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  21. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
  22. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
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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. Rogers, William H. & Winkler, Anne E., 2013. "The Relationship between the Housing & Labor Market Crises and Doubling-Up: An MSA-Level Analysis, 2005-2010," IZA Discussion Papers 7263, Institute for the Study of Labor (IZA).

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