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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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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. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers 2813, C.E.P.R. Discussion Papers.
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  5. Guerrieri, Veronica & Hartley, Daniel & Hurst, Erik, 2013. "Endogenous gentrification and housing price dynamics," Journal of Public Economics, Elsevier, vol. 100(C), pages 45-60.
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  12. 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.
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  19. 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.
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Citations

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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. Kristopher Gerardi & Lauren Lambie-Hanson & Paul S. Willen, 2011. "Do borrower rights improve borrower outcomes? Evidence from the foreclosure process," Working Paper 2011-16, Federal Reserve Bank of Atlanta.
  3. 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).
  4. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
  5. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
  6. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Tomasz Piskorski & Amit Seru, 2012. "Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program," NBER Working Papers 18311, National Bureau of Economic Research, Inc.
  7. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.
  8. Larry Cordell & Liang Geng & Laurie Goodman & Lidan Yang, 2013. "The cost of delay," Working Papers 13-15, Federal Reserve Bank of Philadelphia.

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