How Do Foreclosures Exacerbate Housing Downturns?

Adam Guren and Timothy McQuade ()
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Timothy McQuade: Stanford University

No WP2018-007, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We present a dynamic search model in which foreclosures exacerbate housing busts and delay the housing market;s recovery. By eroding lender equity, destroying the credit of potential buyers, and making buyers more selective, foreclosures freeze the market for non-foreclosures can cause price-default spirals that amplify an initial shock. To quantitatively asses these channels, the model is calibrated to the recent bust. The amplification is significant: ruined credit and choosey buyers account for 22.5 percent of the total decline in non-distressed prices and lender losses account for an additional 30 percent. We use our model to evaluate foreclosure mitigation policies and find that payment reduction is quite effective, but creating a single seller of foreclosures that holds them off the market until demand picks up is the most effective policy. Policies that slow down the pace of foreclosures can be counterproductive.

Keywords: Housing Prices & Dynamics; Foreclosures; Search; Great Recession (search for similar items in EconPapers)
JEL-codes: E30 R31 (search for similar items in EconPapers)
Pages: 66 pages
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mac, nep-rmg and nep-ure
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Related works:
Journal Article: How Do Foreclosures Exacerbate Housing Downturns? (2020)
Working Paper: How Do Foreclosures Exacerbate Housing Downturns? (2019)
Working Paper: How Do Foreclosures Exacerbate Housing Downturns? (2015)
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