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Exploring the Foreclosure Contagion Effect Using Agent-Based Modeling

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  • Marshall Gangel

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  • Michael Seiler

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  • Andrew Collins

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Abstract

Over the last several years, the United States has experienced a significant recession. During this downturn, the number of real estate foreclosures has risen drastically. Recent studies have demonstrated a reduction in property values due to neighboring foreclosures—known as the foreclosure contagion effect. This study uses an agent-based modeling approach to explore market-wide emergent behavior that results from the interconnected property-agent behavior. Specifically, we find that the magnitude of the foreclosure contagion effect is a less powerful cause of eventual market collapse than the time a foreclosed property is allowed to linger on the market. This is important because disposition time is much easier to address from a policymaker perspective than is the strength of the foreclosure contagion effect. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Marshall Gangel & Michael Seiler & Andrew Collins, 2013. "Exploring the Foreclosure Contagion Effect Using Agent-Based Modeling," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 339-354, February.
  • Handle: RePEc:kap:jrefec:v:46:y:2013:i:2:p:339-354
    DOI: 10.1007/s11146-011-9324-1
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    File URL: http://hdl.handle.net/10.1007/s11146-011-9324-1
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    References listed on IDEAS

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    1. Einiö, Mikko & Kaustia, Markku & Puttonen, Vesa, 2008. "Price setting and the reluctance to realize losses in apartment markets," Journal of Economic Psychology, Elsevier, vol. 29(1), pages 19-34, February.
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    5. Michael J. Seiler & Vicky L. Seiler & Stefan Traub & David M. Harrison, 2008. "Regret Aversion and False Reference Points in Residential Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 30(4), pages 461-474.
    6. 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.
    7. Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-493, May.
    8. 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.
    9. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    10. 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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    Citations

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    Cited by:

    1. Michael J. Seiler, 2015. "The role of informational uncertainty in the decision to strategically default," Framed Field Experiments 00621, The Field Experiments Website.
    2. Giorgio Fagiolo & Andrea Roventini, 2017. "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-1.
    3. Firas Zebian & Richard Dusansky, 2015. "Housing Tax Reform and Foreclosure Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 51(3), pages 351-364, October.
    4. Peter Chinloy & William Hardin & Zhonghua Wu, 2017. "Foreclosure, REO, and Market Sales in Residential Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 54(2), pages 188-215, February.
    5. Cohen, Jeffrey P. & Coughlin, Cletus C. & Yao, Vincent W., 2016. "Sales of Distressed Residential Property: What Have We Learned from Recent Research?," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 159-188.
    6. Seiler, Michael J., 2015. "The role of informational uncertainty in the decision to strategically default," Journal of Housing Economics, Elsevier, vol. 27(C), pages 49-59.
    7. Michael J. Seiler, 2016. "The Perceived Moral Reprehensibility of Strategic Mortgage Default," Framed Field Experiments 00622, The Field Experiments Website.

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