Foreclosures, House Prices, and the Real Economy

Atif Mian, Amir Sufi and Francesco Trebbi

No 11-E-27, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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.

Date: 2011-09
New Economics Papers: this item is included in nep-mac and nep-ure
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Related works:
Journal Article: Foreclosures, House Prices, and the Real Economy (2015)
Working Paper: Foreclosures, House Prices, and the Real Economy (2011)
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