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Price Premium and Foreclosure Risk

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  • Seow Eng Ong
  • Poh Har Neo
  • Andrew C. Spieler

Abstract

Many previous studies identify loan, property, borrower and environmental factors that impact the probability of foreclosure. Implicit in these studies is the assumption that the property was purchased at fair value. We question this assumption based on several empirical findings regarding property value uncertainty. In contrast to previous research, we explicitly quantify the price premium from a hedonic pricing model. Using a comprehensive database of real estate transactions in Singapore during 1989-2000, we document a price premium associated with properties that are subsequently foreclosed based on actual sales transactions. In addition, we find that the premium paid at purchase significantly increases the probability of foreclosure. These results are robust and continue to hold after controlling for other property-specific factors, time-varying macroeconomic conditions, alternative model specifications and definitions of price premium. Copyright 2006 American Real Estate and Urban Economics Association

Suggested Citation

  • Seow Eng Ong & Poh Har Neo & Andrew C. Spieler, 2006. "Price Premium and Foreclosure Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(2), pages 211-242, June.
  • Handle: RePEc:bla:reesec:v:34:y:2006:i:2:p:211-242
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    Cited by:

    1. S. Akin & Val Lambson & Grant McQueen & Brennan Platt & Barrett Slade & Justin Wood, 2013. "Rushing to Overpay: Modeling and Measuring the REIT Premium," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 506-537, October.
    2. Wayne Archer & Brent Smith, 2013. "Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 355-378, February.

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