Foreclosure Externalities: Have We Confused the Cure with the Disease?

Yishen Liu and Anthony Yezer

Real Estate Economics, 2021, vol. 49, issue S2, 428-460

Abstract: Foreclosure externalities, in which recent foreclosures proximate to a housing unit depress its sales price, are well accepted in the literature. Past research on foreclosure externalities implicitly assumes that both the partial and total derivatives of the outcome (house value) with respect to the treatment (foreclosure) are equal and constant. This article relaxes these assumptions about functional form. Results reported here show that the causes of foreclosure, mortgage delinquency and negative equity also lower nearby housing prices. Because foreclosure eliminates delinquency and negative equity, it appears to be the cure for the externality rather than the cause. Delay in the foreclosure process prolongs the externality problem and slows price recovery just as delay in application of a cure makes the disease worse. These results demonstrate that functional form matters in testing for overall effects of policy changes.

Date: 2021
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